With the global outbreak of COVID-19 impacting UK businesses, the UK Government has responded by passing the Coronavirus Act 2020 which came into effect on 26th March 2020.
The Act contains protective measures for tenants which has resulted in commercial landlords being caught between a rock and a hard place. Tenants may suddenly find that business has slowed down significantly and as a result are unable to pay their rent, whilst landlords still have financial obligations to their finance providers.
Commercial leases do not normally include force majeure clauses that would suspend the parties’ obligations to comply with certain provisions of the lease. This means that the tenants are still obliged to pay rent and maintain their leased premises in repair, and in turn the landlords are also under an obligation to continue to comply with their contractual obligations.
The new protective measures within the Coronavirus Act 2020 Act provide that:
- A landlord is unable to exercise a right of re-entry or forfeiture (termination) of a tenancy for non-payment of rent from the day after the Coronavirus Act 2020 comes into force i.e. 26 March until 30 June 2020 (the ‘relevant period’). The relevant period may be extended by the Secretary of State. ‘Rent’ includes any sum a tenant is liable to pay under a business tenancy, including insurance rent and service charge.
- For existing litigation, based on forfeiture for rent arrears, a tenant cannot be evicted until after the end of the relevant period,currently 30 June 2020.
- Failure to pay the rent during the relevant period cannot be treated by the landlord as persistent delay in paying rent.
The new protective measures will apply to all leases under the Landlord and Tenant Act 1954 but not most leases for terms of less than six months on properties across England, Wales and Northern Ireland, irrespective of whether the reason for non-payment of rent is as a result of COVID-19 or not. However, they will not affect a landlord’s right to forfeit for any other reason.
Whilst the UK Government has announced that commercial tenants who are unable to pay their rent because of Coronavirus will be protected from eviction, Landlords should not be worried about having to write off missed payments. The rent will still lawfully be due and interest will be accrued on any late or missed payments under the terms of the lease. If the arrears remain unpaid after the relevant period ends, which could be subject to change if the Government deems it necessary, the landlord can exercise its re-entry rights.
How a Landlord should respond will depend on the reasons why the tenant has stopped paying rent.
If a tenant is suffering from cash flow issues, then suing for non-payment of rent will not be in the best interests of either party. The tenant’s business may be further adversely affected if their remaining cash reserves are used to pay rent, which may leave the Landlord without a tenant to occupy the leased premises.
- It may be more prudent to agree a “rent holiday” whereby payment of rent by the tenant is deferred to an agreed date in the future.
- Alternatively, a reduced rate of rent may be better for the tenant and ensures that you are able to maintain your own cash flow. Such an agreement should be properly documented in writing.
- The Landlord may also be able to draw on a rent deposit. The Landlord will however need to check the terms of the rent deposit deed carefully before withdrawing money from the rent deposit account.
There has yet to be a test case before the Court where it has been asked to rule on the impact of COVID-19 on leases. Until there is such a ruling, careful consideration will need to be given on a case by case basis.
We are closely monitoring announcements from the relevant authorities and are always available to help you navigate through this difficult time
For more information regarding the information contained in this article, please call our offices and ask to speak to Kiran Walia or any other member of our Real Estate Team.
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Connaught Law and authors accept no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Connaught Law. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Connaught Law.