The effect of Covid-19 on Commercial Landlords and Tenants
By Tracey Cook
The Government have announced a further extension to the moratorium preventing a commercial landlord from forfeiting a lease due to non-payment of rent.
Paragraph 82 of the Coronavirus Act 2020 (“the Act”) prevents landlords from taking any action to forfeit a relevant business tenancy until the end of the ‘relevant period’. This period was initially from 26th March until 30th June, but was first extended until the 30th September and has once more been extended until 31st December 2020, with further extensions permitted as and when required.
The Act is intended to help those businesses that are suffering financial hardship as a direct result of Covid-19 by ensuring that they are not evicted due to non-payment of rent.
What does this mean for Commercial Landlords and Tenants?
Landlords are not permitted to take any forfeiture action for rent arrears until the moratorium ends and this includes any action that was commenced prior to the Act coming into force. Any existing proceedings that commenced before the 26th March 2020 are covered by the Act and there can be no possession orders granted before at least the 31st December 2020.
It is important for tenants to note that the Act does not suspend a landlords right to receive rent or any other payments due and tenants are advised to continue paying their usual rent payments if they can afford to do so.
What options are available for Landlords and Tenants?
The Government have issued a Code of Practice (the “Code”) for commercial property relationships during the Covid-19 pandemic and that guidance can be found at:
The guiding principle of the Code is transparency and collaboration between both landlord and tenant in reaching a fair and reasonable solution to the issue of continued affordability of the ongoing lease in these unprecedented times.
The Code sets out various optional arrangements that could be agreed upon by both parties and these include but are not limited to:
- a full or partial rent free period;
- deferral of rent for an agreed period;
- amending the rent payments to current market rates or as a proportion of turnover, taking into account any periods where the business had to close;
- enabling landlords to recover any shortfall from the rent deposit on the understanding that the tenant will not be expected to ‘top up’ the shortfall before it is realistic and reasonable for them to do so and waiving any contractual default interest to make any agreed payment plans more affordable.
In return for entering into any of the above arrangements, Landlords may want to consider entering into a reversionary lease, the removal of a tenant’s break right or a extending the term of the lease.
In considering a tenant’s request for a renegotiation of the rent, the Code encourages landlords to consider the impact of contributing issues such as:
- any period of closure and loss of trade;
- the duration of any restricted trading;
- extra costs incurred by the tenant due to social distancing requirements;
- the needs of stakeholders such as banks, employees and suppliers; and
- the tenant’s previous track record.
How does the Act affect other Landlord costs?
Landlords will continue to be responsible for insuring the property and keeping it safely maintained. Where possible to do so, the Code suggests that service charges should be reduced to reflect any reduction in the services provided to the tenant. Alternatively, service charges may be spread over shorter periods to assist the tenant in managing their cash flow.
Landlords are expected to pass on to the tenant the benefit of any reduction in service charge costs due to lack of use of the property.
What Support does the Act provide to Commercial Landlords?
The Act is not intended to penalise commercial landlords and whilst they may not seek a remedy for non-payment of rent through forfeiture, they are permitted to continue to charge interest on any rent arrears.
Landlords may also commence debt recovery proceedings, however a landlord’s right to recover sums under Commercial Rent Arrears Recovery (CRAR) has been restricted with the minimum rent arrears being increased to equal 276 days rent before any CRAR can be commenced. This minimum amount is set to increase further to 365 days on 25 December.
Where any reduction in rental income causes financial hardship, landlords are encouraged to engage with their lenders to seek flexible support where needed and UK Finance have issued guidance in this respect.
This guidance can be found at www.ukfinance.org.uk/covid-19/business-support/support-for-commercial-landlords.
Whilst in the current climate it is impossible to say if the moratorium will be further extended, it is crucial for both parties to remember that the Act will only offer this protection for a short period of time and does not impact on the tenant’s ongoing liability for rental arrears.
Landlords or tenants who wish to seek further advice in respect of their available options or the preparation of any necessary documentation if considering the renegotiation of a their lease, should contact our commercial property team, who will be pleased to assist.