Abstract of machinery with blue tint.

COVID-19 and Commercial Tenants' Rights Regarding Rent

25 March 2020. Published by Elizabeth Alibhai, Partner

This blog sets out various issues for commercial tenants to consider in relation to impending rent payments and government intervention in response to Covid-19. We are currently fielding numerous enquiries from tenants seeking advice about whether rent holidays, reductions and other concessions can be obtained in these unprecedented times.

The Prime Minister's latest announcements requiring business closures and social distancing (Prime Minister's Speech 23 March 2020) have left offices and other commercial properties across the country empty. 

The first port of call is each individual lease, but the vast majority do not contain any force majeure or similar provisions allowing tenants to stop paying rents on the happening of occurrences beyond the landlord's reasonable control. Tenants should therefore be mindful of the remedies at the landlord's disposal should they fail to pay rent as it falls due without securing a formal concession.

Not only can the landlord usually claim interest on any rent that is not paid by its due date (at the rate specified in the lease), commercial leases invariably include a right for the landlord to forfeit the lease on failure to pay all or any part of the rent (usually 14 or 21 days after it falls due). Once the right to forfeit has arisen, the landlord can exercise it either by peaceable re-entry of the property or by serving court proceedings. The tenant would be liable for the landlord's costs in forfeiting the lease, including any court proceedings. 

A tenant can apply to court for relief from forfeiture where it is able to remedy the breach of covenant, but all arrears, including interest and costs, and both parties' court costs would be payable. 

The landlord will have other avenues for recourse where additional forms of security, such as a guarantee or rent deposit, have been provided. Where a guarantee is in place, the landlord can generally seek payment of rent arrears, costs, expenses and interest from the guarantor directly. Many guarantees also include a right for the landlord to require the guarantor to take a new lease of the premises at the same rent and containing like covenants when the lease is forfeited. Where a rent deposit is in place the landlord can draw down sums from the rent deposit to cover the arrears and make additional withdrawals when further sums fall due and remain unpaid. The tenant is usually required to top-up the rent deposit when withdrawals are made, and failure to do so usually gives the landlord an additional ground on which to forfeit the lease.

In practice, however, landlords are often reluctant to forfeit a lease where it will struggle to re-let. Landlords also have to consider practical issues such as empty property rates and reletting and security costs.  Accordingly, we have seen a number of tenants agree rent-free periods of three months or more, sometimes deferred where landlords have an immediate cash need. What can be achieved in each case depends on the leverage that can be brought to bear such as any upcoming break opportunities and on-going renewal negotiations. 

Government ban on evictions

On the evening of 23 March the Government issued a press release in which it stated that it was introducing measures that would mean that "no business will be forced out of their premises if they miss a payment in the next 3 months". The proposals have now been made law under the 'Coronavirus Act 2020' which received royal assent on 25 March 2020. The new legislation states that no right of re-entry or forfeiture may be enforced due to non-payment of rent until the end of the 'relevant period' (30 June 2020 (unless extended)). Although further clarification is needed from the Government as to what the position will be with regards to rent that is not paid during the relevant period once the period has ended, the suspension on forfeiture rights should give commercial tenants some comfort in the short term. 

This is just the latest of a number of measures brought forward to support businesses through the current crisis. Other measures include deferred VAT payments, a business rates suspension for many businesses, grants of up to £25,000 for businesses in retail, leisure and hospitality with a rateable value of up to £51,000, loans under the "Coronavirus Business Interruption Loan Scheme" for SMEs and lending facilities by the Bank of England for larger businesses to support liquidity (Gov.uk).

During these very challenging times, tenants should seek advice before withholding rent and ensure that any agreed concessions are properly documented. We will be publishing further guidance for tenants over the coming weeks.