Restrictions on landlords' enforcement for non-payment of rent during the Covid-19 crisis
The Coronavirus Act 2020 (the “Act”) came into force on 25 March 2020. We have set out in the following sections:
- The measures relating to the postponement of the right to forfeit a lease for non-payment of rent.
- Additional measures proposed by the Business Secretary, Alok Sharma, to restrict the use of statutory demands and the Commercial Rent Arrears Recovery (“CRAR”) procedure.
- The key points to consider for both landlords and tenants in respect of these measures.
- The details of the reaction from the real estate industry.
This article was first posted on 25 March 2020, and updated on 5 May 2020. If you have any further queries following on from this introduction, please do get in touch with our team.
1. Postponement of the right of forfeiture for non-payment of rent
The Act postpones a 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 26 March 2020 and expiring on 30 June 2020) (the “relevant period”). It is expected that the Secretary of State (or Welsh Minister in Wales) will extend the relevant period beyond 30 June 2020.
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.
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”).
The Act is drafted broadly and refers to those tenants and occupiers who are occupying for the purpose of carrying on a business.
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 Act.
2. Proposed temporary ban of statutory demands and restrictions on the use of CRAR
Landlords will be banned from using the following where a company cannot pay their bills due to COVID-19:
- Statutory demands between 1 March 2020 and 30 June 2020.
- Winding up orders between 27 April 2020 and 30 June 2020.
Landlords will not be able to use CRAR unless they are owed 90 days of unpaid rent.
The measures above have not yet been enacted into law by Parliament, but it is expected that:
- the ban on statutory demands will be brought into force under the Corporate Insolvency and Governance Bill. There is at yet no confirmed timetable for that bill being introduced to Parliament and proceeding through the legislative process; and
- the use of CRAR will be restricted by secondary legislation.
3. Key points for landlords to consider
The Act’s relevant period is from 26 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 covers 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.
There appears to be an oversight in the drafting of the Act in not taking into account the different quarter dates used in leases and that rent (particularly in the retail sector) is often paid monthly on the first day of the month.
Owing to the effect of the COVID19 measures, it is anticipated that the periods currently expiring on 30 June 2020 may need to be extended until after the fourth quarter payment date of 29 September/1 October 2020. 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) many are unlikely to have the funds to pay the third quarter after three months of not being able to trade owing to the lockdown measures.
No, the tenant is obliged to pay their rent and the government has urged those tenants who can afford to pay their rent to continue to do so.
Additionally, the measures do not waive a landlord’s right to forfeiture (this could only be done by an express waiver by the landlord in writing). Instead, the ability to exercise the right is delayed until after the expiry of the relevant period under the Act.
Once the relevant periods have 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 'interest' in the dropdown on recourses 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 Act.)
- Rent deposit: Landlords have often refrained from drawing down on rent deposits, preferring to enter into discussions with tenants first, but with limited options for recourse, it may become necessary for landlords to draw down from a rent deposit held. If a company goes into administration it cannot draw down on a rent deposit without the consent of the administrator (owing to the moratorium on enforcement in an administration).
- Guarantor claim: The landlord may seek payment from a guarantor of the lease (so long as they are financially sound). This may be possible where a tenant is part of a wider company group which has exposure to different industries and so there are revenue streams coming from other sectors. Although, based upon the government’s requests, tenants with deep pocketed guarantors would fall into the category of those who can afford to pay their rent and should not therefore be withholding rent.
- Interest: The tenant will be obliged to pay interest on the rent that is not paid. Although, if they do not have revenue to pay their rent equally they will not have the funds to pay the interest due for late payment.
- Debt claim: The Act 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.
- CRAR (where more than 90 days’ worth of rent owed): 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.
The Act 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 Act, 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.
There are currently no measures to suspend any obligations that the landlord owes to its bank.
As these measures are being brought in by legislation, landlords may be able to rely on 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 from the government to assist businesses through these difficult times. We see this as including banks accepting that landlords may not be in compliance with their facility agreements during the COVID19 crisis.
Additionally, the government has emphasised that it sees its support to landlords as being through its extended Coronavirus Business Interruption Loan Scheme. Although, for landlords that already have debt in place it may not be practically viable for them to take on further debt. For further information on the loan schemes available, please refer to this article from our Banking & Finance team.
4. Industry reaction and next steps
The British Property Federation (BPF) has a Coronavirus Task Force which is in regular meetings with ministers from the Treasury and department for Housing, Communities and Local Government. In those discussions the following has been raised:
- it has been emphasised that the landlords are being required to take all the pain with few positive legislatives measures aimed to assist them directly (see below proposals to change that);
- a request was made for stronger messaging from the government on the small minority of tenants who could afford to pay their rent, but are taking advantage of the measures and not paying;
- in terms of positive measures for the industry the following is under discussion:
- Furloughed Space Grant Scheme: a joint proposal with the British Retail Consortium for the government to cover the fixed costs of businesses that have experienced dramatic falls in turnover.
- Business Rates relief: extending existing reliefs to cover a wider mix of occupiers and also to cover empty properties.
The aim of the tenant protection measures has been to provide relief to tenants. However, the measures are a one size fits all approach and do not reflect the diverse nature of the situations that landlords and tenants find themselves in.
If the government does not strike a balance in assisting all those within the real estate industry it could inadvertently create further hardship on a wider scale than just those within the real estate industry.