Coronavirus and rent – tips for business tenants
Lease forfeiture moratorium
Many business tenants decided not to pay their quarterly rent on 25 March; others have reached agreement to pay monthly, and still others have demanded greater concessions. Following the Prime Minister's order for a lockdown on 23 March, the gov.uk website said this about business leases:
Commercial tenants who cannot pay their rent because of Coronavirus will be protected from eviction, the Government has announced.
Many landlords and tenants are already having conversations and reaching voluntary arrangements about rental payments due shortly, but the Government recognises businesses struggling with their cashflow due to Coronavirus remain worried about eviction.
These measures, included in the emergency Coronavirus Bill currently going through Parliament, will mean no business will be forced out of their premises if they miss a payment in the next three months …
As commercial tenants will still be liable for the rent after this period, the Government is also actively monitoring the impact on commercial landlords’ cashflow and continues to be in dialogue with them …
The amendment to the Coronavirus Bill on commercial leases will apply to England, Wales and Northern Ireland [and] to all commercial tenants …
The change will come into force when the Coronavirus Bill receives Royal Assent. It will last until 30 June, with an option for the Government to extend if needed.
The announcement was implemented by section 82 of the Coronavirus Act 2020 on 25 March.
Whilst it is clear that there is now a statutory restriction on landlords forfeiting business leases if rent is not paid, it is important to note that:
the measure will be time-limited, even if it continues beyond June
- the liability to pay suspended or deferred rent is not to be eliminated – it will remain as a debt owed by a tenant to a landlord
How is this going to be dealt with in practice? Forfeiture is only one of the measures to which a landlord can resort if its tenant does not pay rent.
What are the landlord's other options if the rent is not paid?
Unfortunately, there may be landlords who are unwilling to co-operate, or to share the pain. So far, no restriction has been announced about the following landlord remedies.
CRAR, court action and insolvency
Tenants with stock or equipment on the premises may need to watch out if a landlord threatens "Commercial Rent Arrears Recovery" (CRAR). This has to be carried out by an authorised enforcement officer (previously known as a bailiff), but it requires a pre-action notice to be sent to the tenant. A tenant will therefore have some warning that CRAR is in prospect and may be able to do something about it.
Unfortunately, there are bound to be some landlords who are so un-co-operative that they sue for the rent in order to get a court judgment, and others who may simply invoke insolvency procedures, such as winding up. However, it is often possible to stay ahead of those threats through dialogue and by making reasonable proposals.
Guarantors and rent deposits
The previous tenant, or a parent company, or the tenant's directors or proprietors may have guaranteed the performance of the tenant's obligations under the lease, including the payment of rent. So many guarantors may find that they are pursued for the full amount of the rent if the tenant cannot pay an instalment, or only pays part of it.
A rent deposit may have been paid, and if the landlord draws on it, the tenant may be required to top it up. If the tenant does not do that, it may give rise to a debt claim and a court judgment against the tenant, which the landlord may seek to enforce, and which would damage the tenant's credit rating.
The debt won't go away
Even if all the landlord remedies are suspended, they will become available again once the moratorium is over. And even if a lease has come to an end in the meantime, it will only mean that forfeiture and CRAR cannot be exercised. So tenants will need to plan what to do about deferred rent.
Talk to your landlord
Legal trouble commonly springs from tenants not telling their landlords what they are proposing to do. Therefore, any tenant wanting to defer or restructure rent payments is strongly advised to discuss the proposal with their landlord.
Walking away is rarely the answer
Tenants should not think that handing the keys back to the landlord and walking away will be an end to the matter. Unless a proper surrender of the lease is agreed, either in writing or by operation of law, a tenant (and any guarantor) will remain liable, even if a tenant thinks it has given the premises back
More drastic measures
If there really is no alternative, it is possible that Administration or a Company Voluntary Arrangement (CVA) may be the only alternative. Both procedures are part of the 'rescue culture' which has arisen in recent years to keep businesses going, rather than to liquidate them and kill them off.
Administration has the effect of imposing a moratorium on creditors' actions, but if premises are being used for the business, it does not prevent the landlord from claiming on-going rent as a debt in the Administration. However, the process may create a situation in which the business can be resurrected, with a lesser burden of debt.
If there are sufficient creditors who would support a re-structuring of debts, it is possible that a CVA may be the answer. CVAs have become particularly common amongst larger retailers (Debenhams, Carpetright, and others). They work if supplier-creditors are able to out-vote landlords. Thus it has become common for CVAs to propose that all supplier-creditors are paid in full, whilst landlords are required to take a rent reduction.
See our article about managing Coronavirus disruption.
Record any agreement in writing
Whatever a tenant agrees with the landlord, it should be documented; this avoids argument later. Many leases and other contractual documents contain provisions which prevent variations (including concessions) unless they are agreed in writing.
Finally: Speak to us
If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Andrew Baines, Partner and Head of Michelmores' Property Litigation team.
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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.