8 Oct 2020 - by Reed Smith LLP

Negotiating Commercial Property Rights and Lease Payments During COVID-19

The COVID-19 pandemic has presented many challenges for charity and non-profit landlords and tenants within the UK. The restrictions implemented by the UK government’s lockdown have had a widespread impact on revenue streams, particularly those generated through public donations and fundraisers, resulting in many tenants seeking to agree some sort of financial relief from landlords. The following update offers guidance for both third sector tenants and landlords during these uncertain times.

Note: This update was first published on the A4ID website in June 2020. To continue providing up to date information, this update was amended and reposted in October 2020.

Irrespective of office closures, most leases maintain that rent remains payable even if premises are empty, leaving tenants with questions about how to navigate their present circumstances whilst safeguarding their future interests. Landlords will also have concerns about whether they will receive rent during what are already proving to be difficult times, and how they can enforce their rights should a tenant default.

Lease Termination

Prior to March 2020, the law allowed commercial landlords to terminate a lease if a tenant fell into arrears of rent or committed other breaches of its obligations under the lease. This right is known as forfeiture.

The introduction of the Coronavirus Act 2020 has provided a reprieve for commercial tenants, as it prevents landlords from exercising their right of forfeiture based on non-payment of rent until at least 30 June 2020. Further, the legislation stipulates that if a tenant is already subject to an existing claim for rent arrears, a landlord is unable to evict the tenant prior to 31 December 2020.

Whilst this does provide reassurance for tenants that eviction is not imminent, it is important to note that rent will still accrue throughout these periods, and tenants will still be liable for any unpaid sums after the restrictions are lifted. These sums may well include additional interest, according to the lease terms.

Can tenants terminate leases early if the financial impact of COVID-19 makes continued rent payments unsustainable and carry business from a cheaper premise or from home?

Unless the lease contains a right to break the term, tenants can only terminate their lease with the agreement of the landlord, and that may be hard to come by. Force majeure clauses – which excuse one or both parties from the terms of a contract under unexpected circumstances – are not common in leases in England and Wales. Nor has the legal doctrine of frustration (where an unforeseen event either renders contractual obligations impossible, or radically changes the party’s principal purpose for entering the contract) gained much traction to the point where it has been of any assistance to tenants.

Even if a lease does contain a break right, it will usually require six months’ advance notice to exercise. Tenants should also be wary of the risks of exercising break clauses during the current lockdown. Vacant possession is a common pre-condition to the exercise of a break right, so before deciding to serve a break notice, tenants should consider whether it will be logistically possible for them to access the premises to remove all equipment and possessions in advance of the break date. The ongoing restrictions on movement are likely to make this more difficult, providing an opportunity for a landlord to challenge the break if they wish to do so.

Rent Suspension

The Commercial Property industry has seen a surge of tenants requesting to defer, reduce or suspend rent payments whilst the lockdown is in place. There is no ‘one size fits all’ outcome here, and a landlord is entitled to deal with any request as they see fit. The government has made it clear that they expect landlords to work collaboratively with struggling businesses, though there is no outright obligation on landlords to agree to vary rent payments. The industry is however seeing that, whether for commercial or reputational reasons, landlords are willing to discuss proposals with tenants where they can see genuine hardship.

Whilst it is unlikely that landlords will agree to waive rent payments completely, tenants should take a proactive approach and contact landlords to negotiate as forcefully as they can. Any agreements should be documented to provide clarity and avoid disputes further down the line. Through A4ID’s Pro Bono Brokerage service, NGOs, social enterprises and development organisations can access pro bono legal assistance for both landlords and tenants in drafting such proposals and supporting negotiations.

Where rent payments are deferred by agreement, tenants should ensure they have a reliable plan in place to enable them to pay those deferred rents on the date agreed.

Changes to UK Legislation

The Corporate Insolvency and Governance Act 2020 (the CIGA) further restricts the actions landlords can take to pursue a tenant for rent arrears. CIGA prevents landlords from serving statutory demands or presenting winding up petitions against tenants until 31 December 2020 at the earliest, unless they can prove that COVID-19 has had no financial effect on the tenant, or that the grounds on which they are petitioning would have arisen even if COVID-19 had no financial impact on the tenant.

For those tenants experiencing financial difficulties due to COVID-19, the restriction offers temporary protection against the prospect of liquidation. This is good news for tenants, as it leaves landlords with very limited ways to enforce missed rent payments.

In addition, CIGA increases the amount of rent arrears a tenant has to accrue in order for a landlord to exercise Commercial Rent Arrears Recovery (CRAR) by instructing enforcement agents to seize the tenant’s goods. Previously, a tenant only had to have at least 7 days’ worth of unpaid rent to authorise the landlord’s use of CRAR. Following a series of extensions implemented in March and June 2020, recent legislation enforced on 29 September 2020 now requires tenants to have accrued 276 days’ unpaid rent. This will further increase to 366 days following 25 December 2020.The substantial increase makes this method of enforcement much less appealing for landlords, reducing its usefulness as a quick fix solution even after lockdown measures have eased.

Although changes in the law have been made to help tenants during this time, it should be noted that landlords are still able to chase tenants for arrears through the issue of debt claims in court, charging interest on arrears, withdrawing funds from rent deposits or by pursuing guarantors.

Additional support

Charity Property Help offers pro bono advice and support for charities on all property matters, from planning and environmental issues, to leases, disputes and maintenance.

Information in this update has been provided by A4ID’s Legal Partner Reed Smith LLP and does not constitute legal advice. If you require specific legal advice arising from the matters outlined in this update please contact the A4ID Pro Bono Legal Services Team at [email protected].