As a result of the protective measures included in the Act, commercial landlords will probably be caught between a rock and a hard place; tenants may suddenly find that business has slowed significantly (if not ceased altogether) and are possibly unable to pay their rent, whilst landlords still have financial obligations to finance providers/mortgagees.
Commercial leases do not typically include force majeure clauses that would suspend the parties’ obligations to comply with certain provisions of the lease. However, whilst this will mean that tenants are still obliged to pay rent and maintain their leased premises in repair, it also means that landlords are still required to comply with their contractual obligations, such as providing access to the premises and service media, and the provision of services including removal of refuse etc.
It is important to read your lease to ensure that you comply with all your obligations as a landlord even though your tenant may cease to comply with their own covenants in the lease.
Some landlords may be considering introducing building closures. This decision should not be undertaken lightly as this is likely to interfere with rights granted to a tenant under its lease, including a tenant’s right of access to the premises. Where a closure is mandated by the Government, it is likely to be applicable to both parties. However, where a closure is being contemplated by a landlord, the landlord should carefully consider the terms of the lease and check that it has the ability to impose temporary suspensions of the rights granted to the tenant.
How you should respond will depend on the reason why the tenant has stopped paying rent.
If a tenant is suffering from cash flow issues because of a downturn in business or because they have been ordered to close by the Government (the Government has published guidance on which businesses must close under the Health Protection (Coronavirus, Business Closure) (England) Regulations 2020) then suing for non-payment of rent may not be in the best interests of either party; the tenant’s business may be crippled if their remaining cash reserves are used to pay rent, and this may leave you without a tenant to occupy the leased premises.
It may be more prudent to agree a “rent holiday” whereby payment of rent by the tenant is deferred to an agreed date in the future. Alternatively, a reduced rate of rent may be better for the tenant and ensures that you are able to maintain your own cash flow. Such an agreement should be properly documented in writing. It is also important to consider that if the leased premises are subject to a mortgage or other legal charge that any agreed rent holiday does not negatively impact your obligations to a mortgagee or financial backer. For more detailed advice and assistance with this, please contact David Whitaker on 0113 280 2118 or Julian Rowden on 0114 228 3280.
You may also be able to draw on a rent deposit or to call on a guarantor to pay instead. You will need to check the terms of the rent deposit deed carefully before withdrawing money from the rent deposit account. And you may have to give formal notice to guarantors before they are required to pay. In particular, notice often has to be given within six months of the arrears arising (i.e. within six months of the date each unpaid instalment of rent fell due), otherwise the right to pursue a guarantor for those arrears can be lost.
If a tenant proves to be unreasonable, all usual remedies for failure to pay rent are still available to landlords. The only exception is the right to forfeit the lease; read more about the three-month forfeiture moratorium in our blog post “Surviving the COVID-19 crisis as a Commercial Tenant”. It should be noted that the success of remedies such as issuing debt recovery proceedings, serving statutory demands and taking action against guarantors will depend on the genuine financial position of the tenant and/or guarantor, and in the current climate it is likely that tenants/guarantors simply cannot pay. In these circumstances, an open discussion where both parties can work towards an amicable solution should be favoured.
One important point to note is the impact that the Act has on commercial rent arrears recovery (commonly referred to as “CRAR” and previously known as “distress” or “sending in the bailiffs”). The usual rule is that where a landlord uses CRAR to recover unpaid rent, it is deemed to have waived its right to forfeit the lease. However, the Act says that no conduct by the landlord can be regarded as waiving its right to forfeit the lease and that such a waiver can only be given expressly in writing. Therefore, it appears that for the time being a landlord could exercise CRAR without prejudicing its rights of forfeiture, albeit that rights of forfeiture for non-payment of rent are currently suspended. In reality however, there will be practical difficulties for a landlord considering using CRAR in the current circumstances.
We are experienced in drafting supplemental agreements with tenants and negotiating them with their representatives, so please contact David Whitaker on 0113 280 2118 or Julian Rowden on 0114 228 3280 to find out how we can assist you with this.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.