Coronavirus Bill: postponement of the right of forfeiture for non-payment of rent
1. Postponement of the right of forfeiture for non-payment of rent
Right of forfeiture
The Coronavirus Bill ("the Bill") postpones the landlord’s ability to exercise its right of forfeiture in respect of non-payment of rent against a business tenant during the period commencing on the day after the Bill is enacted and expiring on 30 June 2020 or such other date as determined by the relevant Secretary of State (or Welsh Minister in Wales) (the “relevant period”). For example, if the Bill is enacted on 25 March 2020, the relevant period will commence on 26 March 2020.
There may be a gap between the second quarter’s rent due date on 25 March 2020 and the commencement of the relevant period (depending on when the Bill is passed by Parliament). If the tenant does not pay the rent on the quarter date they are at risk prior to the commencement of the relevant period starting of landlords exercising their rights of forfeiture. However, in practice most leases have a grace period before the landlord may exercise its right of forfeiture for non-payment of rent. On this basis, provided the Bill is passed in the next few days, the gap will not be an issue.
Forfeiture proceedings already at court
The postponement also applies to any court orders made relating to forfeiture proceedings for non-payment of rent from the High Court or County Court relating to applications made prior to the relevant period. No orders will be made for a tenant to give possession to a landlord of premises prior to the expiry of the relevant period.
Opposing a request for renewal lease
Where a landlord would like to oppose a renewal lease request, they are to disregard persistent delay in paying rent during the relevant period as a ground for opposing a renewal request from a tenant under the Landlord and Tenant Act 1954 (the “LTA 1954”).
Which tenants does this measure apply to?
The Bill is drafted broadly and refers to those tenants and occupiers who are occupying for the purpose of carrying on a business.
What is meant by “rent”?
This is also broadly drafted to include any sums due under a lease, so not just annual rent, but also service charge, insurance rent and other outgoings. In this note, we use “rent” as defined in the Bill.
2. Key points to consider
When is rent due under the lease?
The Bill’s relevant period is likely to start just after the second quarter payment date of 25 March 2020 and will expire on 30 June 2020, so it is important to check when rent is payable under the relevant leases.
- If payable on what is known as “English quarter days”, the relevant period will cover the period after the second quarter payment date of 25 March 2020 and the tenant paying its rent on the third quarter payment date on 24 June 2020.
Whereas if payment dates for rent in the lease are on “modern quarter dates” then rent is payable on 1 April 2020 for the second quarter and 1 July 2020 for the third quarter.
This appears to possibly be an oversight in the drafting of the Bill by not taking into account the different quarter dates used in leases and also that rent (particularly in the retail sector) is often paid monthly on the first day of the month. We anticipate that if this issue is raised after the Bill is in place by tenants’ associations or business associations, the relevant Secretary of State will extend the relevant period to cover those who pay rent on 1 July 2020.
Indeed depending on the length of the Covid-19 measures, the relevant period may need to be extended at a later date because while tenants will have traded in the first quarter of 2020 (and so theoretically may have the funds to pay the second quarter rent on 25 March/1 April 2020 they may not have the funds to pay the third quarter after three months of not being able to trade owing to the lockdown measures. As such, the Secretary of State may need to extend the relevant period to postpone the right of forfeiture until after the fourth quarter payment date of 29 September/1 October 2020.
Does the Bill amount to a waiver of a right of forfeiture for non-payment of rent?
No, unless the landlord expressly waives their right to forfeit in writing to the tenant. The ability to exercise the right is delayed until after the expiry of the relevant period.
Once the relevant period has expired, the tenant will be required to pay all of the rent due from the preceding quarters where the rent was not paid (including any interest, see below) in order to avoid forfeiture. As such, tenants should consider how they will manage their cash flows after the relevant period ends in order to meet those rent liabilities.
Additionally, landlords who have third party debt in place, will not be in breach of any restrictions in their financing documents relating to waiving rights under an occupational lease as there is no waiver. (Although, please see below further discussion on financing document obligations and the Bill.)
Is the obligation to pay rent under a lease waived or deferred by the Bill?
No, the obligation to pay rent remains. The landlord has the following alternative remedies to forfeiture:
- Interest: The tenant will be obliged to pay interest on the rent that is not paid.
- Debt claim: The Bill does not prevent the landlord from making a claim for breach of the obligation to pay the rent as a debt claim through court proceedings.
- Rent deposit: The landlord may also enforce by drawing down from any rent deposit held.
- Guarantor claim: The landlord may seek payment from a guarantor of the lease (so long as they are financially sound).
- Commercial rent arrears recovery (CRAR): This allows a landlord to enter the rented premises and seize assets of the tenant of an amount equivalent to the rent owed. Albeit this may cause further harm to the tenant’s business in the long-run so is often threatened by landlords to reach a settlement with the tenant, but not used in practice.
- Statutory demand: A landlord may issue a statutory demand in relation to unpaid rent as a first step towards threatening winding up proceedings.
Can proceedings be brought in relation to other grounds for forfeiture?
The Bill does not restrict the landlord from exercising its right to forfeit a lease for another reason, such as insolvency of the tenant or for breach of the repair obligations.
However, while not expressly addressed in the Bill, we consider it likely that a court would be minded to grant relief from forfeiture at least until the end of the relevant period while the Covid-19 measures remain in place. Practically, it would be difficult for a tenant to vacate premises during a lockdown period.
Additionally, a landlord should consider its public reputation when considering the best course of action for defaulting tenants while the Covid-19 crisis continues.
How do these measures interplay with complying with financing documentation?
The Bill does not suspend any obligations that the landlord owes to its bank.
As these measures are being brought in by legislation, this may assist some landlords as there are sometimes carve outs where certain action or inaction (as in this case) is in compliance with law.
Commercially it is understood that the financing sector is also under pressure to assist businesses through these difficult times. We see this as including banks accepting that landlord’s may not be in compliance with their facility agreements during the COVID19 crisis.
We expect further industry guidance may be issued on the operation of loan documentation (and complying with certain continuing representations and undertakings in facility agreements) from the Loan Market Association or other property associations, such as the British Property Federation in response to the Bill in due course
3. Further legislation
As with a lot of the UK Government’s policy at this time, we anticipate that further secondary legislation may be issued to provide clarity on certain parts of the Bill as practical issues arise during the crisis. We will look to update our advice as and when such measures are announced.