We recently posted some answers to some frequently asked commercial landlord and tenant questions arising from the Coronavirus lockdown. We have now had a few weeks of the lockdown and a new set of questions being asked frequently. These are some of them:
What does the Coronavirus Act 2020 say about landlord and tenant?
It is widely known that this Act prevents landlords from forfeiting leases for non-payment of rent. It also deals with consequential questions following from that initial prohibition, so now it is not possible for a landlord to waive the right to forfeit for non-payment of rent by any act that it does during the three month period to 30 June 2020.
What it does not do is equally important. It does not let tenants off payment. The sums fall due as they ordinarily would, it is just that the landlords no longer have the right to forfeit as a result.
The other landlord's remedies are discussed in some of the other FAQs below. Bear in mind that the Act does not cover licences: technically licences are not forfeited, they are simply terminated, which might explain the distinction, but a licence to occupy can be brought to an end in the same way as before for non-payment of rent if that is what the parties agreed could happen.
The tenant says he or she will not pay the rent, where else can I look for the rent to be paid?
The rent is still due. If the tenant refuses to pay, then that tenant is in breach and the sum is therefore in arrears. There are several practical steps that you could take.
First, check whether there is a rent deposit deed and money in a rent deposit account. The deed will say who holds the money and whether or not the landlord is allowed to drawdown from the rent deposit sum. Most rent deposit deeds do. They also include a clause enabling the landlord to force the tenant to top-up the rent deposit deed to the full amount. This is the very scenario for which a rent deposit deed was set up in the first place.
Second, check whether there is a guarantor. This could be a party guaranteeing the lease directly, or could even be a former tenant who has given a guarantee as part of an authorised guarantee agreement (AGA).
Third, check to see if there is a sub-tenant in place, even if in occupation of part. There are ways of getting any sub-rents paid by that sub-tenant to the tenant to be diverted up to the landlord when there are arrears.
Fourth, check to see if there is bank backed guarantee – albeit that this is less common these days.
How can I enforce my right to claim rent if a tenant refuses to pay?
The Coronavirus Act 2020 has taken away one of the major enforcement tools available to a landlord, namely forfeiture. Given the current market many landlords would not want to forfeit the lease anyway without a new tenant lined up to take occupation of the premises straightaway - that may be a rarity in the post covid-19 world.
In addition, on 23 April 2020 the Government announced it would be introducing a series of measures which prevent landlords from using the threat of insolvency to enforce the debt. Any existing attempts to wind up a tenant or place an individual into bankruptcy as a result of non payment of rent are to be voided. At the same time the Government has announced that CRAR (Commercial Rent Arrears Recovery - i.e. sending in the bailiffs) is only available for debts that exceed 90 days worth of rent. This is even if you could find a bailiff willing to enter into other premises as the present time, because of general social distancing concerns.
None of this prevents the fact that rent has become due. It is simply a question about how to make a tenant pay. If a landlord can afford to be patient, after the lockdown has been lifted and these rules reversed the full amount of the rent is payable together with any contractual interest that the lease allows a landlord to claim for late payment. More than ever these new rules emphasise the need for an active dialogue between landlord and tenant about what will happen both during the lockdown and when it is finally lifted.
How does this affect break clauses?
A break clause is not a forfeiture of the lease and therefore the Coronavirus Act 2020 does not prevent either the landlord or the tenant from exercising a break clause. Given that most commercial leases are protected by the Landlord and Tenant Act 1954, so if a landlord serves a break notice, it must also go through the process under the 1954 Act.
Most break clauses exercisable by tenants are subject to two standard conditions. The lockdown causes traps for the tenant hoping to comply with these conditions; the first standard condition is that all sums due and payable under the lease have been paid by the break date. If the tenant wants to exercise the break clause, not only must that tenant pay the March rent, but it must also pay any interest on it that the lease allows whether or not that interest has been demanded. Even the smallest amount of unpaid interest (whether or not demanded or even calculated by the landlord) is enough to invalidate the break notice. This is a trap that tenants could easily fall into at this time, when minds are focused elsewhere. It may not be a trap that landlords would necessarily want to bring to the attention of tenants.
The other common condition for tenant breaks is that the premises are handed back with vacant possession or without subsisting sub-leases. Whilst this is easily dealt with in normal times (the tenant needs to ensure that no-one is occupying the premises, and that its goods have been removed), in practice during the lockdown, it may struggle to find people willing to enter the premises to remove the goods.
If I want to give a rent concession, what kind of provisos should I put on it?
It is entirely a matter of commercial negotiation taking into account the new realities whether or not the lease concession is granted and, if so, what it should look like. However, the following are the kind of issues that a landlord should consider:
- Is it a waiver of the right to the rent, or is it simply a deferral of the time when it is payable? If it is simply a deferral, should the landlord look to recover interest for it?
- Is this personal to this particular tenant, so that if the tenant assigns, the new tenant will be fully liable going forward?
- Landlords and tenants need to define exactly what the extent of any concession is in terms of which payments the concession relates to.
- Should the concession be conditional on ongoing compliance either with any repayment schedules, or indeed with any other covenants under the lease.
- Landlords should be very careful not to fall into the Consumer Credit Act trap if they set up a repayment plan for a tenant in arrears - a repayment plan is a form of credit, and as such can require FCA authorisation. Not all repayment plans are caught by this, but care needs to be taken.
- Finally, it may not be entirely within the landlord's discretion to grant a rent deferral or concession: check banking facilities and the requirements of insurers first.
If a lease ends during the lockdown
- As a landlord, the principal issue at lease end (apart, of course, from finding a new tenant) is the condition in which the outgoing tenant has left the premises. With the lockdown, it is impossible to get a Schedule of Dilapidations prepared. This is not a particular issue in general, as breach of a repairing covenant in a lease has a limitation period of 12 years – in other words, you have 12 years to make your claim. There will be plenty of time after the lockdown is over to think about a claim. In one instance though, it could be a problem. This is to do with reinstatement.
- There is no automatic obligation to reinstate alterations carried out by the tenant; such an obligation needs to be specifically written into either the lease or a Licence for alterations. A common wording is that the landlord is entitled to require reinstatement of alterations, but must notify the tenant of this. Normally, that's not a problem – it's all wrapped up in a schedule, but if schedules aren't produced, the opportunity could be missed. Landlords need to be alive to this, so as not to lose the chance to get the premises reinstated (perhaps to a shell condition ready to accept the next tenant's fit-out) at the cost of the outgoing tenant.
