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Commercial leases and the Coronavirus Act 2020

Faye Hyland
20/04/2020

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United Kingdom

In the haste to publish new legislation to cover the effects of the COVID-19 pandemic in the UK, there has been some confusion surrounding the law's application to commercial leases. Here, we summarise and clarify the current position.

 
The government announced on 19 June 2020 that it will be extending the restrictions on the ability of landlords to recover commercial rent arrears from tenants as follows:

 
  • Amending the Coronavirus Act 2020 to extend the moratorium on evictions for non-payment of rent from 30 June to 30 September
  • Further legislation preventing landlords using Commercial Rent Arrears Recovery unless they are owed 189 days of unpaid rent
  • Amending the Corporate Insolvency and Governance Bill, extending the temporary ban on the use of statutory demands and winding-up petitions where a company cannot pay its bills due to coronavirus until 30 September.
For more information, please contact commercial real estate specialists Antony Phillips, Owen Talfan Davies or Faye Hyland.


The Coronavirus Act 2020

Contrary to some initial misunderstanding, the Coronavirus Act 2020, which came into force on 25 March 2020, does not waive or defer a tenant's obligation to pay rent under a commercial lease.

However, section 82 of the act implements a moratorium of three months, until 30 June 2020, during which landlords may not forfeit commercial leases for non-payment of rent.

This period may be extended by the government and applies to forfeiture by court proceedings and peaceable re-entry.

When the moratorium ends, landlords will be entitled to recover any unpaid rent, including interest, accrued during the moratorium period. Landlords will also be free to forfeit a commercial lease if payment is not made.

The Ministry of Housing, Communities and Local Government (MHCLG) recently clarified a number of unanswered questions arising from the act, addressing the following key points:

Rent – for the purposes of the forfeiture moratorium, rent includes "any sum" a tenant is liable to pay under a business tenancy. As such, the forfeiture moratorium will apply to service charge and all other outgoings under a lease.

Business tenancy - section 82 of the act is intended to cover "all commercial leases with someone in occupation of the premises for the purposes of their business."

This means the forfeiture moratorium will cover all commercial leases, whatever their length of term and irrespective of whether they enjoy security of tenure protection under the Landlord and Tenant Act 1954, where someone is in occupation of the premises for the purposes of their business.

While MHCLG has not yet provided definitive guidance on the point, it is thought that section 82 of the Act will apply to headleases, provided some part of the premises is occupied for business purposes.

Consensual forfeiture – section 82 of the act appears to prohibit consensual forfeiture.
MHCLG has indicated that whether forfeiture by consent is caught by the moratorium will depend on the facts of a given case.

Landlord's other remedies – section 82 does not currently impact upon the other remedies which remain available to a landlord to recover unpaid rents.

However, MHCLG refused to rule out any future extension of the moratorium to other landlord remedies such as CRAR, winding up or debt actions.

The MHCLG is monitoring enforcement of non-payment closely and keeping the issue under review.

The threat of insolvency as a remedy, while not impacted by section 82 of the act, is restricted in its effect by recent court rules effective during the pandemic.

 
Practical steps for landlords and tenants

As the act does not defer or waive a tenant’s obligation to pay rent, landlords are under no legal obligation to agree to a reduction in rent or rent holidays at the request of a tenant.

However, many landlords and tenants are having conversations and reaching voluntary arrangements about rental payments which have fallen due, or are due shortly.

There may, for example, be commercial or reputational reasons why a landlord would want to engage with a tenant in respect of any request, particularly where this is necessary to avoid tenant insolvency.

When making requests for reductions in rent or rent holidays (in the case of a tenant) or considering a request (in the case of a landlord) parties are advised to consider:
  • Seeking legal advice as soon as a request has been received, or it becomes clear that a difficulty in paying the rents due under a lease has arisen;
  • The landlord and tenant's respective cash flows and ability to generate income during and following the coronavirus pandemic;
  • The availability to both landlords and tenants of insurance and/or government assistance;
  • The position under any loan facility or headlease;
  • The nature of the request – i.e., whether the proposal is to defer, reduce or entirely suspend the rent and any proposal as to what could be done in the future; for example, stepped rent, future top ups of rent over a period or later in the term or changes to future rent review terms / other lease terms following recovery; and
  • The availability of any rent deposit or guarantor.
In all cases, any decisions of this type must be documented very carefully by lawyers, particularly where a guarantor is party to a lease.

For more information and our analysis of the impact of the coronavirus lockdown, please see our previous article: How will coronavirus impact UK commercial landlords and tenants?
 
For expert advice on these and other property-related issues, please make contact with our team of specialist contentious real estate experts.

For more information please visit Fieldfisher's COVID-19 content hub, we are updating this daily with up-to-date information.
 

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