15 minute read: Updated 30th April 2020
Coronavirus Act 2020: Business Leases and Forfeiture Q&A
At this extraordinary time, things continue moving very quickly as the coronavirus pandemic unfolds. In terms of business leases and forfeiture, please always take professional advice before acting to make sure you reduce your risk and remain within the law.
This article covers Q&As for landlords and tenants in relation to recent legislation.
The expedited passing of the Coronavirus Act 2020 into law on 25th March was part of the UK Government’s action plan to respond to the Covid-19 crisis and keep businesses running.
Legislation is being passed at a speed never seen before and it is understandable that there are many issues which will need to be clarified by secondary legislation. In the meantime, what are the practical implications for landlords and tenants?
Business leases and forfeiture for landlords
Q1. If the tenant doesn’t want to pay full rent and I am happy to share the cost? What do I need to document this?
There is nothing to stop a landlord and tenant reaching agreement on a rent concession. The key considerations are that it should be documented and it should be clear as to how long the concession applies for. Given the current uncertainty, setting a time limit on a concession to apply may be a difficult negotiation. In reaching agreement, account should also be given to any Government support a tenant might be receiving. It is critical that the drafting is watertight to avoid disputes further down the track, and we can help with the drafting of such agreements for the landlord or the tenant.
Q2. The tenant wants to renegotiate the whole lease due to Covid-19. Do I have to agree?
There is nothing in law to require a landlord to re-write lease contracts just because of extraordinary, unexpected events though if a landlord wants to be that accommodating then clearly that is their prerogative.
Equally whether a landlord decides on some permanent relaxation or concession then that is a commercial and moral decision for them to make. Such permanent revisions to a lease contract should be properly documented to avoid a dispute in the future, and again, that is something we can help with.
Q3. The tenant has not paid my rent, can I take back the property?
The Act postpones the landlord’s right to forfeit a lease for non-payment of rent by a business tenant until 30th June 2020 (or another date later determined by the UK Government). This applies to both rent and also other payments such as service charges and insurance payments. Once the relevant period expires the tenant has to pay all of the outstanding rent and other sums due to avoid forfeiture.
Q4. Can I forfeit the lease for breaches of tenant obligations other than payment of rent?
Technically the Act does not restrict the landlord from exercising its right to forfeit a lease for another reason, such as breach of the tenant repair obligations. This may only be an oversight due to the speed of implementation of the legislation.
Whilst not expressly addressed in the Act, it seems unlikely in the current climate that a court would look sympathetically on a landlord seeking to pursue forfeiture on such grounds as this would appear to be against the spirit of the Act. In any event, practically it would be difficult for a tenant to be able to vacate premises during a lock-down period as this is unlikely to be regarded as ‘essential travel’.
Q5. Can I rely on a Rent Deposit to plug the gap of non-payment of rent?
It is likely that a landlord can use a Rent Deposit to bridge any non-payment of rent, but the terms of the Rent Deposit Deed should be checked first. The tenant would then also be required to bring the rent deposit back up to the minimum required by the Rent Deposit Deed once the landlord has used some or all of the rent deposit held. If you need advice on the terms of a Rent Deposit Deed then please get in touch.
Q6. Can I take other proceedings against a defaulting tenant?
The original Act did not prevent a landlord’s claim for Commercial Rent Arrears Aecovery (CRAR), issuing a statutory demand, or issuing winding up proceedings.
The Corporate Insolvency and Governance Bill (to be published imminently, as at 30th April 2020):
- provides that a CRAR can only be issued if there are 90 days rent outstanding
- provides a ban on the use of statutory demands until 30th June 2020
- while winding up petitions can still be presented they will only proceed where the underlying cause for not paying rent is unrelated to Covid-19.
Q7. Can I claim against a guarantor?
Technically yes, but as with other enforcement mentioned above, this is not without its practical complications and risks. We can consider your options with you and enter into communication with tenants and guarantors as required.
Business leases and forfeiture for tenants
Q1. Can I just end my lease because of Covid-19?
Leases don’t generally contain ‘Force Majeure’ clauses to allow for termination of a lease just because of an unforeseen event. Technically a tenant could instead argue that the lease contract has been ‘frustrated’ because the tenant has not been able to occupy the premises, but as the frustration has not been caused by the landlord it seems unlikely a court would be sympathetic to this argument.
Q2. Can I withhold rent and other payments due?
Leases require the payment of rent and other sums on set dates and neither the current crisis nor the Act change this principle. In ordinary times non-payment of rent would allow a landlord to change the locks without notice and take back the property by peaceable re-entry (known as ‘forfeiture’). However, the Act suspends the landlord’s ability to take forfeiture action for non-payment of rent until 30th June 2020. The consequence is that no tenant can be removed from their business premises if they fail to make a rent payment in that period. Naturally, that period could be extended if the effective lock-down continues.
Once the period expires the tenant has to pay all of the outstanding rent and other sums due to avoid forfeiture. If a tenant is withholding rent or other sums then they need to budget to catch up on any missed payments in full on or before 30th June 2020 (including the June Quarter payment in advance if applicable).
Q3. Has the landlord waived the right to rent?
No, between 26th March and 30th June the non-payment of rent by a tenant and the lack of any reaction from a landlord will not be deemed to be a waiver by the landlord to the right to be paid rent. Likewise, the postponement period does not act as a waiver of the landlord’s right of re-entry or forfeiture at a later date. The rights are suspended until 30th June, not removed for all time.
Q4. Can I use this opportunity to re-negotiate the terms of my lease?
The position is the same for the landlord and the tenant – Covid-19 in itself does not oblige the parties to agree any change in the terms of the lease. However, most landlords will want to help tenants and secure their long term occupation of the premises (thus securing also rental income and reimbursement of insurance premiums).
Practical trade-offs such as changing from quarterly to monthly rent payment terms or a landlord agreeing a rent-free period in exchange for a tenant giving up its break opportunity may be sensible options. Any re-structuring of the lease contract needs to be properly documented to take effect in law and to avoid the risk of a future dispute. We can help draft such agreements.
Q5. I occupy under a licence, not a lease, am I protected also?
The Act only mentions leases and not other occupational arrangements such as licences. This may be deliberate but it is probably more likely that the speed at which the Bill was passed means that it was not considered. That said, the courts are less interested in what an arrangement is called and instead what an arrangement is, practically. If it has the hallmarks of a lease in law then even a more informal arrangement may be considered a lease and therefore covered by the Act.
Furthermore, courts may well seek to implement the Act based on its spirit rather than the fine detail given the extraordinary times we live in. It is a brave landlord who seeks to run the reputational risk and the wrath of the courts by arguing its case around the margins and shadows of the Act. If you require advice as to the status of your occupation of your premises then please get in touch.
Q6. My lease states that I have to stay open between certain hours. Can the landlord claim I am breaching the lease if I have been ordered to close during a lockdown?
Leases generally require the parties to observe legislation and so if the Government has ordered for certain premises to remain closed then it is very unlikely a court would entertain a landlord’s claim for breach of tenant obligations in these circumstances.
Q7. I run a restaurant but now want to provide take-away food. Am I in breach of my planning permission?
The Act implements a new permitted development right to allow a change of use to takeaway food where the current use for the premises is within A3 (restaurants and cafes) and/or A4 (drinking establishments and pubs), but the local council must be informed and permitted trading hours for hot food takeaways must still be observed.
This new provision applies until 23rd March 2021.
Tenants should still check that they are not breaching any prohibition within their lease as some leases will include specific use exclusions to protect nearby tenants of the same landlord.
Any change or relaxation to permitted use clauses within a lease will still need to be agreed with a landlord before the change is implemented and it is hoped that landlords will be reasonable. We can help with drafting any agreement between landlord and tenant to implement such temporary changes.
If you are unsure where you legally stand in terms of the Coronavirus Act 2020, please contact one of our Commercial Property experts Ian Millington by email or phone for a free initial discussion about your particular circumstances.
We recommend that you seek professional advice before taking any action.
Read the Institute for Government’s details about the Coronavirus Act 2020 here.