Commercial leases commonly include forfeiture provisions enabling the landlord to re- enter premises where the tenant has been in arrears with rent for a certain period, where the tenant is in breach of any other tenant covenants, or where the tenant has entered into an insolvency procedure.
With the March quarter day looming (25th March), the government has announced commercial tenants who are unable to pay rent due to the impact of COVID-19 have protection from forfeiture of their leases until at least 30 June 2020.
The provision will only delay the right to forfeiture – it will not affect a landlord’s right to claim forfeiture or recover rent after the three-month period ends. The government said it will monitor the impact on commercial landlords’ cash flow and “continues to be in dialogue with them”.
NON-ESSENTIAL BUSINESS CLOSURE
Government guidance on which shops can remain open following last night's implementation of further lockdown measures. Whilst not exhaustive, the key guidance is clearly "non-essential businesses and premises must now shut". It will be reviewed in three weeks' time.
Communities Secretary, Rt Hon Robert Jenrick MP said: "We know many commercial landlords are already setting a great example by working closely with tenants and offering rent deferrals or holidays". See our article on rental concessions.
The government hopes that "the new measures will provide reassurance to businesses struggling with cashflows and ensure no commercial tenant is evicted if they cannot pay their rent because of coronavirus over the next three months". However the measures could have significant consequences for landlords grappling with their own balance sheets.
SUMMARY OF KEY POINTS
- The measures are contained in section 82 of the Coronavirus Bill (CB) which had its second reading in the House of Commons on 23 March 2020.
- The changes require Royal Assent before coming into force. It is anticipated that this will be imminent.
- Even if Royal Assent takes a few more days, the right to forfeit for non-payment of rent does not tend to arise until 2-3 weeks after the relevant payment falls due in any event as breach usually occurs where rent has not been paid for over 7-21 days – forfeiture clauses in leases will need to be checked to clarify the point.
- Currently the measures apply to business tenancies in England, Wales and Northern Ireland. For England and Wales this means essentially any tenancy which has security of tenure for the purposes of the Landlord and Tenant Act 1954, or would have such protection if it had not been contracted-out.
- The measures apply until 30 June (relevant period), but could be extended if the government decides.
- The changes relate to non-payment of rent (defined in section 82(12) CB as "any sum a tenant is liable to pay under any relevant business tenancy"). Depending on the lease terms, in addition to annual rent, this could include insurance, service charge payments, and interest.
- Certain landlord activities can amount to a waiver of forfeiture. Section 82(2) CB provides that no conduct by or on behalf of the landlord during the relevant period is to be regarded as waiving the right to forfeit for non-payment of rent. This appears to be good news for landlords and seems to imply that the right will remain unless waived in writing.
- The CB also makes provision for any ongoing Court proceedings seeking forfeiture of a lease with the effect that the Courts must not grant an order other than one which provides for possession before expiry of the moratorium period.
- The measures do not apply to forfeiture for any other tenant breach of covenant or insolvency proceedings (although in such circumstance a section146 notice would be required as a pre-requisite). The CB also does not prevent enforcement of other remedies or impact the ability to claim late payment interest in accordance with the provisions of the leases.
- The moratorium on forfeiture also applies to commercial leases in Northern Ireland, but this article does not deal with that location.
- Many tenants will struggle to meet rental payments. The measures are an attempt to persuade landlords to act in a collaborative manner with their tenants given that the ultimate sanction regarding enforcement of lease obligations has now been (temporarily) removed.
- While the measures remove the immediate cashflow pressure on tenants of the March quarter day, the government has made it clear that constructive negotiations should take place between landlords and tenants to reach a solution on payment.
- That said, the use of the Company Voluntary Arrangement (CVA) process by many companies (particularly retailers) to reduce lease liabilities has steadily risen. We may ultimately see a new wave of CVAs particularly in the retail, hospitality and leisure sectors in the future once the protective measures end.
We will keep you informed of further updates as the situation progresses.