COVID-19: Commercial Property Update
3 April 2020
We have had a number of enquiries from both landlords and tenants asking how they should deal with the massive impact on their business caused by the coronavirus.
Landlord and tenant relationships are usually long term relationships and, generally speaking, the majority work well. There are, however, those that are more challenging. Whether the nature of the existing relationship affects how the current problems are addressed by the parties is obviously a matter between the parties themselves. With human nature being as it is we surmise that the nature of the relationship will have an impact of how the parties deal with the current issues. So what is the position and what options are available?
We have already covered the main elements of the Coronavirus Act 2020 ("the Act") in our previous three articles. In this article we consider why the parties ought to have a constructive dialogue and look at the effects of short term behaviour on the longer term consequences of the future landlord relationship.
For the tenant, one of the main impacts is the temporary suspension of the ability to forfeit the lease for non-payment of rent. This suspension is presently set to expire at the end of June 2020 (although it is possible it may be extended). Rent includes any payment due from the tenant to the landlord under the terms of the lease. This includes service charges to cover ongoing costs such as insurance.
The Property Litigation Association Law Reform Committee has asked the Ministry of Housing, Communities & Local Government (MHCLG) a series of questions relating to the interpretation of the Act and the questions and answers are available by clicking here.
As you will read, the policy objective is to cover all commercial leases with someone in occupation of the premises for the purpose of their business to be protected. Additionally, the courts have also suspended the ability to commence possession actions (and enforcement of existing orders) for a period of 90 days; accordingly, forfeiture by way of court action cannot take place and therefore issuing court proceedings for possession is not an option at the moment.
On the face of it, this is great for tenants and their immediate survival. However, this will no doubt cause real difficulties for landlords who may not have the cash to comply with their lease obligations. This has the potential for future litigation if not handled properly.
So while forfeiture for non-payment of rent is not an option, the Act does not mean that rent is not payable. All the Act does is provide a moratorium against forfeiture, which will (currently) expiring on 30 June 2020. The rent remains lawfully due.
With the tenant apparently having the complete upper hand, what are the options for the landlord? Perhaps this can be considered in two parts: firstly the immediate issues and second, the medium to longer term issues.
The landlord still has a number of options available at the moment. Whether these options remain open for much longer remain to be seen. The options are either to commence winding up proceedings or insolvency proceedings, to issue court proceedings for the rent as a debt action or to enforce payment under the commercial rent arrears recovery procedures. Additionally, whilst forfeiture for non-payment of rent is currently off the table, forfeiture for other breaches of covenant (including insolvency) remains very much part of the landlord's arsenal. So the tenant is not free from all threats. Whether these options are commercially prudent will depend on the individual circumstances of each case.
When the moratorium is eventually lifted, it currently appears that rent that has not been paid during this period will give rise to a ground for forfeiture. It is reasonable to anticipate regulations will be introduced to prevent this. However the landlord can usually allocate any rent payments received to cover the moratorium period so the forfeiture threat becomes very real immediately after 30 June 2020.
As the rent remains lawfully due and will continue to fall due in the future, and as forfeiture for non-payment of rent comes into play, tenants will be well-advised not to refuse to pay anything and should consider maintaining open lines of communication with the landlord. There will become a time when the landlord has all the options so opening a dialogue and discussing ways constructively to get through not just the next few months but the next 12 months and beyond may well be in the tenant's best interests.