With the Government’s implementation (and then extension) of a statutory moratorium on lease forfeiture for non-payment of rent (currently up to 31 December 2020, though expectation is that this will be extended again until April 2021), what are the issues and options available to landlords in the event that the tenant is in breach of its lease obligations?
Whilst, understandably, much focus has been on struggling tenants and their employees during the Covid pandemic, it’s worth remembering that landlords are businesses too, and they have their own concerns (and staff).
At present, a landlord isn’t permitted to evict a tenant for non-payment of rent (including service charge, insurance rent and other any other sums the tenant is liable to pay under the lease) during this moratorium. The moratorium won’t affect a landlord’s right to claim forfeiture, or recover rent, after the expiry of the existing moratorium period (unless it’s extended again).
The current sentiment is that institutional landlords are starting to struggle. Many landlords are geared or have financing arrangements, but have had a number of remedies taken away from them for pursuing defaulting tenants, and so they too are experiencing difficulties. The issues are then being compounded by dropping rents across the country. In London for example: Bond Street rents coming in at around £75 per square foot earlier in the year have dropped about £10 psf; rent free periods of 12 months or more are being offered; West End rents are dropping more quickly than in the City, but they are all (generally) going down at the moment. In addition, larger occupiers in particular (but small and medium-sized companies are in a similar position) are looking to offload surplus space while employees are forced to work from home.
Whilst it’s undoubtedly crucial to protect our retail and office tenants, we should also spare a thought for the landlords; after all, commercial property has always been central to the UK’s investment attractiveness.
On top of the forfeiture moratorium, the Government has imposed an additional restraint, preventing commercial landlords from issuing statutory demands or winding-up petitions against tenant companies that can’t pay their rent (or other sums under the lease), due to the impact of Coronavirus. This also runs until 31 December 2020 (query whether it will also get extended). A landlord can still present a winding up petition against a tenant company, but that petition must first be reviewed by the courts to determine why it can’t pay: if the court is satisfied that it is indeed because of Coronavirus, the petition will be dismissed. The ban also extends to landlords exercising Commercial Rent Arrears Recovery ("CRAR") unless they are owed at least 276 days of unpaid rent (or 366 days for notices served after 25 December 2020). In essence, this stops a landlord from using CRAR from the March quarter onwards, though it’s worth remembering that arrears before this aren’t affected.
So what can a landlord do?
There's not too much at the moment, but it can:
- issue a court claim still (e.g. apply to wind up as above). This is going to take some time however, and could prove costly, particularly if the outcome goes against the landlord. Alternatively, the landlord could bring a claim for a money judgement in relation to the arrears, which, though still not guaranteed, could be quicker and more cost-effective
- draw down on any rent deposit (and require it to be topped up, though if the tenant can’t pay its rent, will it be able to do this?)
- pursue a guarantor (including a former tenant under an AGA) to enforce against them
- demand that any subtenants pay their rents directly to them (this is under s.81 of the Tribunal, Courts and Enforcement Act 2007). The problem with this though, is that the CRAR period (276/366 days) still needs to have passed before this remedy will become available. It isn’t, therefore, of immediate use, but is worth remembering for a later date
- negotiate a side letter to offer a compromise (e.g. temporarily reduce or delay the payment of rent or permit it to be paid monthly). Landlords won’t want to vary the lease (in most cases) and will want to keep it confidential so that other tenants don’t catch wind
- vary the rent review provisions. It could look to introduce a turnover rent, or have more frequent reviews, or, possibly, offer upwards/downwards reviews. Turnover rents have their own obstacles though: what about online sales and in-store returns; what about restaurants with Deliveroo/Uber Eats/Just Eat etc. services? This is very data-driven and labour intensive to manage, from both sides. Upwards/downwards reviews may not be particularly palatable for a landlord either, particularly one with a financing arrangement, or outside investment, in place.
All in all, it’s a tricky situation for all parties involved, and is one which doesn’t seem to be going away anytime soon - indeed, Rishi Sunak has finally recognised that bringing furlough to an end was premature, especially now that we're being forced into Lockdown 2.0. The best advice is to keep an open dialogue with each occupier (on an individual basis and not in groups) and try to reach a compromise position.
Chancellor Rishi Sunak has announced the furlough scheme will be extended to the end of March in a bid to “protect millions of jobs” during the coronavirus second wave. Explaining the significant reversal in Government policy, Mr Sunak said he had to make “rapid adjustments” to the economic response to Covid-19 pandemic, owing to how the virus has spread.