Locked Out During Lockdown?
Even before the Covid-19, conditions for commercial landlords and their tenants were challenging and uncertain. The rise of e-commerce was a challenge to the traditional High Street and caused a number of well-known casualties. Use of Company Voluntary Arrangements and administrations has been one of the biggest stories in retail over the last 18 months, used by tenants to gain breathing space for rent adjustments or time to arrange a sale.
The Covid-19 pandemic and the associated lockdown will exacerbate the situation.
The first measure to modify the existing law to ease that pressure is the Coronavirus Act 2020 (“the 2020 Act”).
The 2020 Act introduces legislation to implement a temporary “ban” on use of statutory demands and winding up petitions to recover debt unpaid “due to COVID-19”. If a company is “unable to pay its debts” because of Covid-19, then the court will not allow a winding up petition to be presented.
In this guide we review the 2020 Act as it applies to commercial landlords and tenants. It is an overview of the law and is not a replacement for formal legal advice tailored to a specific situation.
For further information, please contact Robert Syms on 01189 478638 or contact by email RobertSyms@cavershamsolicitors.co.uk.
The Law Before the 2020 Act
A landlord would be entitled to forfeit the lease if a commercial tenant is in breach of:
• A condition of the lease; or
• A covenant contained within the lease.
Generally speaking, landlords would need to serve a Notice under Section 146 of the Law of Property Act 1925 (“a Section 146 Notice”), which will allow the tenant some time to remedy the breach. However where there has been non-payment of rent a Section 146 Notice is not necessary.
Forfeiture takes place, either upon:
• Expiry of the Section 146 Notice or;
• Upon the landlord being entitled to exercise the rights to forfeit for rent arrears in accordance with the lease
Once the right to forfeit has established a landlord can either re-enter the premises, commence possession, or alternatively forfeiture proceedings.
Tenants in receipt of a Section 146 Notice or facing forfeiture proceedings may be able to apply for “relief from forfeiture”.
Landlords and Tenants involved in forfeiture proceedings are recommended to seek legal advice as there are implications and risks for each in these circumstances.
The 2020 Act
From 26 March 2020 to 30 June 2020 or such later date as is specified, where there is non-payment of rent under a business tenancy, a landlord:
• Cannot enforce a right of re-entry or forfeiture on the basis of non-payment of rent; but
• Will not be regarded as waiving its right to re-entry or forfeiture for non-payment of rent, unless the landlord has provided an express waiver in writing.
For proceedings begun prior to 26 March 2020, any order made by the court granting possession to the landlord will set a date after 30 June 2020, or such later date as may be specified.
The 2020 Act also relates to applications for renewal and/or the continuation of existing business tenancies under the 1954 Act. In circumstances where a landlord has opposed a tenant’s application for a new tenancy in view of the tenant’s persistent delay in paying rent, it is not possible for a landlord to rely on any failure to pay rent during the relevant period.
The 2020 Act does not prevent a landlord from enforcing a right of re-entry or forfeiture for other purported breaches of covenant.
The moratorium brought in by the 2020 Act only applies to non-payment of rent. Clearly, other breaches of the lease may be connected to cash flow issues, or related to Covid-19 and the protections provided by the 2020 Act should offer some protection to tenants. However, there is no express protection referred to in the 2020 Act and very likely this will be cause future argument.
Practical challenges may be the greatest issue for landlords seeking to take forfeiture proceedings as social distancing has caused restrictions upon operation of the court service for non-urgent business.
Prior to the Government’s announcement in addition to or as an alternative to forfeiture, the landlord could either use the commercial rent arrears recovery process, serve a statutory demand or present a winding up position against a defaulting tenant. These were useful as a commercial tenant going into an insolvency process could be used as grounds to bring a lease to an end. These steps will not be available to the landlord once the Government’s announcement becomes law. The temporary legislation will restrict the ability of landlords to present winding up petitions against defaulting tenants and prevent use of the commercial rent arrears recovery process unless 90 or more days unpaid rent is owed.
Considerations For Landlords
The 2020 Act will not prevent you from trying to recover unpaid rent. You can still bring proceedings against the tenant for rent arrears, or bring proceedings under a personal guarantee for the rent or recover any rent arrears or any deposit held (subject to the terms of the deposit).
Such actions are likely to be criticised, but the government has not introduced legislation to prevent these means of recovery.
Practical challenges and delays to bringing and advancing proceedings in the current climate and there is need to consider how the courts are operating.
If a tenant is in breach of other terms of the lease, the 2020 Act does not prevent you bringing a claim for possession/forfeiture on expiry of a Section 146 Notice, or for bringing a claim for debt or damages.
In the current circumstances, before taking those steps, it is worth reflecting on: –
• Provisions under the lease allowing you to remedy the breach and recover those sums as a debt rather than damages
• Will you be able to find a new tenant straightaway?
• The commercial implications of having to finance the property’s overheads during the void period
• Will forfeiture release any third parties (for instance insurers or guarantors) from any liability to you?
• Could you make use of possession of the property to achieve other plans for by demolition or redevelopment or your own use?
Forfeiting the lease for a technical breach might present an opportunity. However, there are clear risks associated with this sort of action in the current uncertain circumstances.
Advice should be obtained relating to the landlord circumstances
Considerations For Tenants
If you are in default of your rent obligations under the lease, the 2020 Act will protect you from forfeiture/possession proceedings while in force. However, liability to pay the rent remains.
If you are in default of other obligations under the lease, you will be at risk of a Section 146 Notice and eventual forfeiture. If your landlord is relying on the lockdown to find you in technical breach of the lease, you should seek advice on what steps to take next. There may be other provisions in the lease to protect you.
If you have received a Section 146 notice, you will need to comply with it. If there is good reason for not complying with it then you may be able to obtain an injunction to prevent forfeiture.
If forfeiture has already taken place, you may be able to apply for relief from forfeiture.
Before taking any of these steps, you may want to consider:
• Varying the existing lease to remove onerous conditions? In the current climate, the Landlord may be willing to accept a lower rent so that it does not have a void property;
• Obtaining consent from the landlord to sub-let the property?
• Surrendering the lease to bring your obligations under it to an end?
• Entering into some form of insolvency arrangement for example a CVA?
• Any personal liabilities which you will be exposed to if you default in your obligations under the lease?
Robert Syms is regularly instructed in real estate matters, litigation, commercial and residential landlord and tenant matters by SMEs, private individuals and developers.
To discuss issues that might be affecting you or your property portfolio, or arrange a video conference please email Robert on RobertSyms@cavershamsolicitors.co.uk or contact him on 01189 478638.
