Commercial leases for landlords and tenants – FAQ
Does a tenant who cannot trade have to pay rent?
Most leases contain a clause suspending the requirement to pay rent where premises cannot be occupied due to an event that is covered by the landlord’s insurance policy. It is highly unlikely that the coronavirus pandemic is an insured risk covered on a landlord’s policy for loss of rent, although some occupiers may be able to make a claim for losses caused by the pandemic if they hold business interruption insurance. For a list of insurers whose policies could provide such cover see here.
The measures announced by the UK government do not include a release from any contractual obligations to pay rent. Government advice and press releases consistently state that tenants who can pay rent should do so.
On 10 March the government announced that if discussions between landlords and commercial tenants who owe rent do not result in them reaching agreements to pay or write off rents by 30 June 2021 and there remains a significant risk to jobs the government is prepared to take further steps. It is not yet clear whether these steps may go beyond another extension of the measures first introduced in the Spring of 2020.
Can a landlord use commercial rent arrears recovery (CRAR)?
Not currently. On 24 April 2020 the government introduced regulations to restrict the use of CRAR. The initial restrictions were expected to end on 30 June 2020, but as the impact of COVID has become more severe there have been extensions to this period. On 9 December 2020 it was announced that these will continue until the end of March 2020. Currently where CRAR takes place before 24 December 2020 rent must be 276 days in arrear. This increases to 366 days where CRAR takes effect on or after 25 December 2020. On 10 March 2021 the government announced its intention to increase the total number of days’ outstanding rent required for CRAR to be used to 457 between 25 March and 23 June 2021, and 554 between the 24 and 30 June 2021.
In any event, CRAR cannot be used for sums other than the annual rent. Nor can CRAR be used where the demised premises contain residential premises.
Can a landlord issue court proceedings for rent arrears?
There is no prohibition on commencing court proceedings. This means that a landlord can issue court proceeding for rent arrears at this time.
Can a landlord serve a statutory demand for rent?
No. The Corporate Insolvency and Governance Act 2020 prevents a winding up petition being presented until after 30 June where the landlord relies on a statutory demand served after 1 March 2020.
The act also prevents a winding up petition being presented until after 30 June 2021 unless the landlord can show it has reasonable grounds for believing that coronavirus has not had a financial effect on the tenant company, or the company would have been unable to pay even if coronavirus had not had a financial effect on the tenant. This is likely to be very difficult so in practice we expect to see all petitions stop while these provisions apply.
What should we do if we want to arrange a temporary waiver or rent concession?
We recommend that any waiver or concession is documented in writing. You will want to consider whether any concession needs to be subject to conditions. Where there is a guarantor, they will need to be involved to avoid inadvertently releasing him or her from future liabilities.
On 19 June the government published a Code of Practice for commercial property relationships during the COVID-19 pandemic. This encourages transparency and co-operation when discussing requests for discounts or waivers.
On 10 March the government announced that if discussions between landlords and commercial tenants who owe rent do not result in them reaching agreements to pay or write off rents by 30 June 2021 and there remains a significant risk to jobs the government is prepared to take further steps. It is not yet clear whether these steps may go beyond another extension of the measures first introduced in the Spring of 2020.
Can a landlord draw down on a rent deposit?
Yes. There are no coronavirus restrictions on withdrawing sums from a rent deposit. The terms of the rent deposit deed should be followed. This may require notice to be given. Consideration should be given as to how to serve a valid notice.
Can a landlord forfeit a commercial lease?
It is not currently possible to forfeit for non-payment of rent where Part 2 of the Landlord and Tenant Act 1954 applies to the lease. Part 2 does not apply to mining leases, tenancies under six months (unless there is provision to extend the term or the tenant has been in occupation for more than six months), farm business tenancies or tenancies covered by the Agricultural Holdings Act 1986.
The restriction applies to court proceedings and effecting peaceable re-entry to forfeit a lease for non payment of rent. The government announced on 9 December that this will remain the case until the end of March 2021.
Where a landlord had commenced proceedings before 25 March 2020, the court cannot make an order for possession to take effect before 31 December 2020. If an order for possession has already been granted it cannot be enforced before 31 December 2020.
Forfeiture for breaches other than non payment of rent is unaffected by the Act. It will be necessary to serve a section 146 notice and allow a reasonable time to pass before seeking to forfeit the lease.
Will a break option still apply?
Yes, a break option still applies as there are no restrictions on either party relying on an option to end a lease early. Care will need to be taken to ensure that the requisite break notice is properly served.
If the break is conditional, for example on providing vacant possession or undertaking reinstatement works, consideration will need to be given to whether the conditions can be met. If conditions cannot be met force majeure, a clause in a contract that allows the agreement to be broken in the event of unforeseeable circumstances, is unlikely to assist the tenant. This is because there are seldom force majeure clauses in leases. A tenant may want to rely on the doctrine of frustration, although there is no certainty that this will apply.
An unconditional break clause will still operate if the tenant cannot gain access to remove their possessions. Failure to remove to give vacant possession following a valid break notice will be a breach of the yield up obligations only. A landlord would have a claim for damages. It could require payment of double rent under the Distress for Rent Act 1737. The landlord would owe the tenant a duty of care as an involuntary bailee of the goods left behind.
Is the lease frustrated as the tenant is prevented from occupying due to government restrictions?
There is no case in which a lease has been frustrated. Frustration requires an outside act which the parties could not have, and did not, contemplate. In 2019 the court decided that Brexit did not frustrate a lease. In 2004 in Hong Kong the court decided that SARS did not frustrate a lease. To some extent the length of the disruption caused by the coronavirus pandemic and the length of the lease will determine whether a court faced with a tenant arguing that its lease is frustrated is prepared to agree that the doctrine does apply to COVID-19. It may be that tenants who are unable to take advantage of a break option or who have shorter leases are better placed than those with long term leases to make a case for their lease being frustrated.
