At LawBite we are seeing an increasing number of queries and concerns following the spread of COVID-19 and how it impacts the rental sector.
We have brought together the most frequently asked questions, so you can understand more about how your business can respond and what support is available for you.
Can a tenant stop paying rent?
Yes. However, the contractual obligation in the lease to pay rent remains and interest will be added to any arrears. The interest rate should be detailed in the lease.
Even if the landlord closes the building, the tenant will most likely still need to pay the rent. This is because leases commonly require tenants to pay rent, without deduction or set off.
The tenant can then seek to recover damages for breach of landlord’s covenant as a separate action. Consultation with the tenant in relation to any potential closure may help to minimise the risk of litigation in the future.
What can landlords do if their tenant does not pay?
The landlord has a range of options to deal with the situation where the tenant has failed, or refuses, to pay rent:
- Forfeiture. Forfeiture is the landlord’s right to determine the lease and regain possession of the premises. However, it may not be in the landlord’s commercial interests to take the property back. If the property is likely to be vacant for some time, the landlord may want to keep the existing tenancy in place, pursuing alternative remedies and secure the future performance of the tenant’s covenants.
Please note the section below regarding the current suspension of the right to forfeit due to the Coronavirus outbreak.
- Rent deposit. Draw down if there is one.
- Pursue a guarantor or former tenant for the rent arrears. In some circumstances, the former tenant or guarantor can require the landlord to grant an overriding lease or require the existing lease to be assigned, thus becoming the landlord’s direct tenant. The landlord should factor this in when deciding who to pursue.
- Court proceedings to recover debt, which can include other sums due on top of the rent. However, this process can be expensive and protracted. A court hearing may not be set for several months and the tenant may not feel any impetus to pay the arrears in this period.
- Statutory demand and insolvency proceedings. A statutory demand can be served when there is no dispute as to the amount of the debt and must be satisfied within 21 days or the tenant can be faced with a bankruptcy or winding-up petition. This is often a preferred alternative to court proceedings.
However, the government has announced that it will introduce further emergency measures to protect commercial tenants from winding-up and insolvency proceedings. It is unclear, at the present time, how the mechanics of these restrictions will work in practice and Landlords will need to take advice from a LawBite lawyer as to what remedies are available to them at the relevant time.
- Commercial Rent Arrears Recovery (CRAR). CRAR allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears. Where a landlord has the right to recover rent from its tenant under CRAR, the landlord also has a right to recover rent from an under tenant. This may be a useful option if the under tenant is better placed to pay than the head tenant.
Please note that the Government has imposed temporary restrictions on the use of CRAR during the COVID-19 crisis. A Landlord wishing to use this remedy will need to speak to a LawBite lawyer to assess what remedies may be available at that particular time.
- Payment agreement. The parties can agree a payment plan to settle rent arrears. This is a separate agreement to the lease and must be carefully drafted, so as not to compromise the Landlord’s legal rights to pursue the tenant for those rent arrears.
Is the Government doing anything to help commercial tenants?
Yes, as detailed above.
The Government has suspended the right for landlords to bring forfeiture proceedings until 30 June, 2020. This means that a landlord of commercial premises cannot take action to forfeit the lease for non-payment of rent, or any other sums due under the lease, for the period 26 March to 30 June 2020. However, the liability to pay the rent is not extinguished, it is merely suspended until the suspension period comes to an end (currently 30 June 2020), at which point it becomes due and payable and the landlord can again seek to forfeit the lease for non-payment of all the accrued arrears.
The Government has also introduced restrictions on the use of CRAR and insolvency proceedings.
The Government has also brought in support by way of business rates relief.
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What happens if premises are closed?
This could potentially lead to landlords facing claims from tenants for breach of covenant. However, if closure is required by law or in accordance with PHE or HPS advice, then this could provide a defence to any such claim.
Both parties should check the insurance of the premises. The landlord is likely to need to notify the insurers of the fact the premises will be empty and there may be insurer’s requirements relating to security for the premises.
If a tenant is seeking to exercise a break option to bring the lease to an end early, it should take legal advice as to any precondition relating to giving up vacant possession to the landlord.
Closing the premises may be in breach of the tenant’s “Keep Open” covenant in the lease. However, if a closure is required by law, it is unlikely that any keep open covenant would be enforceable.
Can I end the tenancy?
Probably not. Few leases contain a ‘force majeure’ clause which could allow either party to say that the obligations in the lease are suspended because of Covid-19. It is also unlikely that either party could successfully argue the lease had been frustrated by the pandemic. We are yet to see any COVID-19 cases go through the courts, so this may change.
If the lease contains a break option for either party to terminate the lease early, then this can be operated. Care needs to be taken when doing so and please see our blog on this subject.
Otherwise, the parties can agree to bring the lease to an end and this should be correctly documented by way of a Deed of Surrender.
Can a tenant request a rent suspension?
Yes, and in the current climate many landlords are agreeing to this as well as other concessions, in order to allow both parties to survive and keep the premises occupied. Any such concession must be recorded in an appropriately drafted legal document.
What recourse does a tenant have if it can’t use its property gainfully and can’t terminate its lease?
The tenant currently has support from the government by way of the suspension of forfeiture proceedings, the restrictions on the use of CRAR and insolvency proceedings, and business rates relief.
Tenants should also check their insurance policies to see whether business interruption is covered, noting that there may be exclusions for circumstances such as pandemics.
Probably the best option is for the tenant to approach its landlord to see whether concessions, such as rent payment holidays or a reduction in the rent, can be agreed. Such concessions need to be properly documented and legal advice taken.
This is a fast-changing situation, with the Government bringing in a stream of emergency measures to protect commercial tenants. Landlords and tenants alike should speak to LawBite to ensure they are up to date with the latest developments.
For further business legal advice, please enter an enquiry or call us today on 020 38088314 to speak to a member of our friendly Client Care Team.
The author of this blog post is commercial property lawyer Philippa Cobb.
Philippa worked for many years in London in private practice, advising a variety of SMEs in relation to their commercial property interests, as well as acting for property developers and investors. Following a relocation to Exeter, she then enjoyed an in-house legal role for 10 years with the University of Exeter, advising on a broad range of real estate matters.