Coronavirus Act 2020 – What does it mean for commercial landlords?
The Coronavirus Act 2020 ("the Act") was enacted yesterday (25 March 2020) and as previously announced by the Government includes a provision protecting tenants of business tenancies from eviction for non-payment of rent.
The Act provides that a right of entry or forfeiture under a business tenancy for non-payment of rent may not be enforced by action or otherwise during the relevant period, which is the period from 26 March to 30 June 2020 or such later date as may be specified. It also provides that during the relevant period no conduct by or on behalf of a landlord, other than giving an express waiver in writing, is to be regarded as waiving a right of entry or forfeiture, under a relevant business tenancy for non-payment of rent. What does this mean for landlords?
It means that landlords will not be able to re-enter premises or issue proceedings to forfeit a lease for non-payment of rent until at least 30 June. However, it does not prevent the landlord from re-entering the premises for non-payment of the rent falling due in this period after 30 June.
Whilst this will give worried tenants some much needed comfort for this quarter, it may not go far enough for tenants who will be concerned about what happens after 30 June. However, many landlords will wish to take a long term view of the situation.
When contemplating forfeiture proceedings, landlords have to weigh up the commercial benefit of evicting a tenant who is not paying rent against the reality of finding a willing tenant able to pay rent (any prospective tenant would likely seek to negotiate a rent-free period anyway), the costs of re-letting the property and the costs of forfeiture proceedings. In the current climate therefore, landlords may prefer to wait and see what happens.
There is a concern among landlords that some tenant may use this legislation as a ‘green light’ from the Government allowing them to withhold rental payments for three months even if they do not need to do so. It seems to us that in these difficult circumstances, landlords and tenants should seek to take a collaborative approach and have open discussions with each other about what tenants can afford to pay.
This is not least because the Act only offers a temporary suspension of a landlord’s right to forfeit (rent is, in reality, still payable, and the right to forfeit will come back to life at the end of the relevant period), and interest will typically still accrue under the lease on any late payments. Discussions with the landlord can flush out these points early on.
Options that remain open to landlords – Landlord FAQs
What rent concessions can be given to the tenant?
It remains the landlord’s discretion as to whether they wish to voluntarily offer their tenants a rent concession. The concession should be personal to the tenant and, crucially, properly documented between the parties, to avoid arguments later down the line.
Possible concessions include:
1. Temporarily suspending a tenant’s rental payments (so that the rent will instead become payable at a later, defined date);
2. Temporarily waiving a tenant’s rental payments (so that rent for that defined period will never become payable); or
3. Temporarily accepting rent in arrears, rather than in advance.
Can I draw down on a tenant’s rent deposit?
The terms of the lease and any rent deposit deed should be carefully checked. However, drawing down on a tenant’s rent deposit should, in theory, be possible. Landlords should weigh up the short term benefits of using that money to alleviate cash flow problems against the reduction of the value of the lease if the rent deposit is not later topped back up.
What other options do I have if the tenant does not pay?
While landlords’ ultimate remedy of forfeiture for non-payment of rent is, at present, suspended, others remain operative and can be used at a later date if necessary. Provisions of the lease will need to be carefully reviewed, but options may include:
1. Issuing debt recovery proceedings at Court: These proceedings are relatively straight forward for landlords. However, a successful result still does not guarantee payment from the tenant, and, if no payment is forthcoming, enforcement proceedings would be necessary. Enforcement proceedings can be costly and are only successful if the tenant has assets to enforce against. That being said, in usual circumstances, often a letter threatening Court proceedings is enough to prompt payment. However, in today’s climate it is more likely that tenants simply, genuinely, cannot pay, in which case open discussions to collaboratively find a solution are likely to yield a better response than heavy handed letters.
2. Taking action against the guarantor: Similarly to above, the success of this approach will depend on the guarantor’s financial position.
3. Commercial rent arrears recovery (CRAR): This procedure gives landlords the power to take control of tenants’ goods and sell them to recover the amount owed by the tenant. CRAR can only be used to recover principle rent, however, and not insurance or service charges (or any other sums due under the lease, even if they are reserved as rent).
4. Service of a statutory demand: The landlord can serve a statutory demand on the tenant, which threatens winding up proceedings being commenced against the tenant if payment of the debt (i.e. the unpaid rent) is not made within 21 days. Again, in usual circumstances the threat of a winding up petition is often enough to elicit payment. However, Coronavirus implications currently mean that some tenants simply cannot pay. Landlords should be aware that if a solvent company is forced into insolvency, where they may have survived if they had been allowed more time, this might reduce the chances of recovering the debt (due to the restrictions on recovery under the England and Wales insolvency regime).
These are unsettling circumstances for both landlords and tenants. The appropriate course of action will depend on an array of factors, including the nuances of that particular landlord and tenant relationship, the provisions of the lease in question, and the landlord’s commercial objectives. It is suggested that open, collaborative discussions should be initiated, with the aim of achieving as much certainty as possible for both parties in these difficult times.
As the Coronavirus situation (and consequent legislation) is progressing rapidly, up to date legal advice should be sought.