Coronavirus Act 2020: Implications for Commercial Landlords and Tenants3 April 2020
"The Government’s attempt to provide some financial support and provide commercial tenants with some respite is unlikely to be sufficient for many businesses."
We consider some of the notable repercussions of, and pitfalls inherent in, the Moratorium which are likely to delay business issues rather than solving them. Casualties within the retail, hospitality and casual dining sectors were rising prior to the coronavirus pandemic and companies such as Monsoon Accessorize, The Restaurant Group (the owner of Wagamama and Frankie & Bennies) and Debenhams are reportedly already investigating insolvency options, notwithstanding the Moratorium. The Government’s attempt to provide some financial support and provide commercial tenants with some respite, by deferring one remedy their landlords may implement, is unlikely to be sufficient for many businesses.
Forfeiture is one of many remedies within a landlord’s arsenal. It is also the most serious, as it terminates the tenant’s lease and enables the landlord to take back possession of the property. Most tenants pay a premium on the grant or assignment of their lease. However, there is no automatic right for the tenant to claim its premium back when the lease is forfeit and this can therefore provide a landlord with a windfall.
A tenant may apply to the courts for relief from forfeiture. However, in cases concerning the non-payment of rent, the success of such an application is invariably dependent upon the tenant paying all the arrears and the landlord’s costs. The application must also be made promptly and sometimes within six months of the forfeiture (depending on how the landlord proceeds).
The Coronavirus Moratorium
Section 82 of the Act provides that forfeiture of business tenancies for non-payment of rent cannot be enforced within the “relevant period”. This is defined as being 26 March 2020 to 30 June 2020 inclusive, or a later date if the Secretary of State extends it.
The Act defines “rent” as being any sum a tenant is liable to pay under the lease, which would include service charges and insurance rent contributions. Interestingly, the Act does not say whether rent includes sums payable to third parties, which may lead to litigation concerning its interpretation.
"Unless a landlord has a desperate need to take possession of a property as soon as possible, perhaps to redevelop a site, market uncertainties render vacant premises unattractive."
For forfeiture claims issued prior to the Act, tenants cannot be ordered to give up possession before the end of the relevant period. Further, non-payment during the relevant period cannot be relied on by landlords as a reason to oppose lease renewals under ground (b) of the Landlord and Tenant Act 1954.
Analysis of the Moratorium and Landlords’ Alternative Options
Whilst the Government’s actions appear well-intentioned, there are numerous issues with the Moratorium:
1) Unless a landlord had pre-existing aims to obtain vacant possession of a property, it was likely to avoid seeking forfeiture in any event. We are in uncertain and unprecedented times. Unless a landlord has a desperate need to take possession of a property as soon as possible, perhaps to redevelop a site, market uncertainties render vacant premises unattractive.
2) Commercial tenants that made timely payment of the March quarter’s rent (possibly in ignorance of the impending Act) will have minimal protection from the Act. The Moratorium lifts on 30 June, 6 days after the next quarter date in June.
3) A landlord does not waive the right to forfeit the lease during the relevant period unless it agrees to the contrary in writing. It is possible that the Government may extend the relevant period beyond 30 June. If so, it is difficult to see how tenants who cannot pay their rent now (at the very start of the lockdown) will be in a better position to do so in three months. Whilst e-commerce may help some tenant businesses weather the storm, many rely on customer footfall to generate sales. Further, many retailers have taken the difficult decision to abandon online operations until further notice. For example, Next has currently shut down its warehouses and distribution operations, to avoid becoming a vector of COVID-19. Other retailers may follow suit unless the pandemic abates. If the UK remains in lockdown, which appears likely as infections and death rates rise, trading out of financial difficulty (and being able to pay arrears at the end of the relevant period) will not be easy.
"It is difficult to see how tenants who cannot pay their rent now (at the very start of the lockdown) will be in a better position to do so in three months."
4) What about landlords? Many properties will be subject to secured lending. Even if this is not the case, landlords have expenses to meet too, and some may rely heavily on their rental income. However, no ban on claims against landlords was included within the Act (unless they are intermediate landlords and therefore tenants themselves).
5) Alternative remedies to forfeiture remain available and may have devastating effects on the tenant. As noted above, sensible alternatives to forfeiture would probably have been adopted by landlords during the COVID-19 pandemic, regardless of the Act. However, the Ministry of Housing, Communities and Local Government (in response to queries from the Property Litigation Association) has said that it is “monitoring” other forms of enforcement for non-payment of rent, perhaps alluding to further regulation if it is deemed necessary. These alternative remedies in question, such as CRAR, deposits and court and insolvency proceedings, are considered in more detail in the table at the end of this article.
The Moratorium’s protection for commercial tenants falls short of a comprehensive solution. The UK’s retail and casual-dining sectors were haemorrhaging prior to the COVID-19 lockdown and some players in the market will, unfortunately, struggle to survive during the next quarter.
Many tenants choosing to benefit from the Moratorium will (a) still need to defend alternative action taken by landlords and (b) prepare to discharge their arrears in July 2020 when the relevant period expires (on the current timetable).
However, landlords intending to strike now should obtain detailed advice on their situation beforehand. Otherwise, they may find that they have commenced redundant action against their tenant, which may have been predestined to fail before it started.