COVID 19 – COMMERCIAL LEASES; BAN ON FORFEITURE FOR NON-PAYMENT OF RENT

By Amy Cornelius

The Coronavirus Act 2020 became law on 25 March 2020 and includes measures protecting commercial Tenants who cannot pay their rent, because of coronavirus, from eviction.

Section 82 of the Coronavirus Act 2020 prevents Landlords from forfeiting ‘relevant business tenancies’ during the relevant period’ – the relevant period being 26 March 2020 to 30 June 2020.

However, section 82(12) does expect that the relevant period may need to be extended, possibly multiple times, and provides that extensions can be made by statutory instrument rather than requiring further primary legislation.

Who benefits from protection?

The provision contained in section 82(1), reads simply as follows:

‘A right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent, may not be enforced, by action or otherwise, during the relevant period.’

Although the announcement said the measures would benefit commercial Tenants who cannot afford to pay their rent, it is slightly dubious given there is no means test in section 82 so any Tenant, even one who has sufficient financial resources, is free to take advantage of the new law.

The definition of ‘relevant business tenancy’ is wide enough to include all business tenancies within Part 2 of the Landlord and Tenant Act 1954, even those that have been ‘contracted out’ of the security of tenure provisions afforded by that Act.

Furthermore, the definition appears to suggest that Landlords who are themselves Tenants under a Head Lease will also benefit from section 82, despite not being in occupation.

However, the following  are not protected by section 82:

i) Licence to Occupy (unless it is in reality a Lease, despite being described as a Licence)

ii) Tenancy at Will

iii) Tenancies that are expressly excluded from Part 2 of the 1954 Act, such as farm business tenancies and tenancies not exceeding six months

‘Rent’

Rent is defined broadly in section 82(12) to include ‘any sum a Tenant is liable to pay under a relevant business tenancy’ which would include main rent, insurance contributions, service charges and any other payments due under the Lease.  This means that a Landlord may not forfeit during the relevant period for non-payment of such amounts.

Forfeiture only

Tenants (and Landlords) should take note that Section 82 is limited to forfeiture for non-payment of rent only.  It prevents the Landlord from seeking other remedies or taking enforcement action based on other breaches of the Lease.

Nor does it create a rent-free period – all Tenants remain liable for the rent and all other sums due under the Lease.

If a Landlord is pushed to consider enforcement action, a struggling Landlord will be perfectly entitled to:

• Take payment from a rent deposit
• Add interest to the debt in accordance with the interest provisions in the Lease
• Sue the Tenant and/or any Guarantor for the debt
• Exercise Commercial Rent Arrears Recovery
• Serve a statutory demand and institute the relevant insolvency process

Of course, many Landlords will not want to forfeit the Lease during the current time given re-letting the premises may be virtually impossible and the Landlord will not want to assume liability for business rates.

Landlords may wish to be more creative when faced with Tenants withholding rent e.g. in return for agreeing a formal rent reduction or rent holiday to help a struggling Tenant through the immediate crisis, is the Tenant prepared to agree to remove a break clause or perhaps extend their term?

At the same time, Tenants who are considering taking advantage of section 82 should also be conscious if they are exercising a break clause conditional on the rent being up to date in order for the break to be effective.

Are Landlords forfeiture rights waived?

Section 82 also makes provision to ensure that neither Landlord nor Tenant is prejudiced in the future.

Typically, a Landlord must be careful once the right to forfeit has arisen not to ‘waive’ the right to forfeit by doing anything that acknowledges that the Lease is continuing.  Section 82(2) of the new Act provides that no conduct by the Landlord during the relevant period (other than an express written waiver) is to be regarded as waiving the right to forfeit.

Other implications

Similarly, Tenants might be worried that non-payment of rent now might be held against them on a subsequent lease renewal but Section 82(11) confirms that any failure to pay rent during the relevant period shall be ‘disregarded’ if the Landlord seeks to oppose renewal on the grounds of ‘persistent delay in paying rent’.

Communication is key

Is it important that Tenants think twice before withholding rent and other lease payments – Landlords do not have to take a passive stand and it is always best to commence conversations early on in order to encourage and maintain good Landlord and Tenant relationships and reach any voluntary agreements between the parties promptly.

If you would like to discuss anything contained in the above, or have any other query in relation to Commercial Property, please get in touch here