March 24, 2020

COVID-19 UK: Real estate updates for landlord and tenants

New measures announced by the UK Government yesterday will prohibit landlords from evicting commercial tenants who cannot pay their rent for the next 3 months.

With the March quarter day coming up tomorrow, 25 March, landlords and tenants are asking us what this latest announcement means for them.  In this update, we will guide you through the answers based on the legislation as it is currently drafted. We will, of course, keep you updated as we hear more from the Government on this.

What is prohibited?

The Coronavirus Act 2020 prohibits landlords from enforcing a right of re-entry or forfeiture under a relevant business tenancy by any means for non-payment of rent until 30 June 2020.  This means that forfeiture and re-entry for other reasons, such as breach of a non-payment covenant is still available to landlords.

Which leases does the prohibition apply to?

The prohibition applies to nearly all tenancies which are occupied by a tenant for the purposes of a business, so it will cover shops, offices, industrial estates and similar.  Certain leases will be excluded from the prohibition: these include leases for 6 months or less, tenancies at will, licences, certain leases of agricultural holdings, farm business tenancies, mining leases, leases where the tenant occupies by reason of an office or employment, home business tenancies, leases of certain railway property, leases of certain military establishments and leases of electronic communications apparatus.

Which sums does the prohibition apply to?

The prohibition applies to any sum a tenant is liable to pay under a relevant business tenancy so it will capture rent, service charge, insurance rent and any other payments that are due to landlords. 

Which tenants can benefit from the prohibition: is it just those who can't pay the rent because of COVID-19?

The prohibition is a blanket prohibition on re-entry or forfeiture by landlords for non-payment of rent.  The reasons for non-payment are irrelevant, so if a tenant does not pay its rent because it can't due to cash-flow problems caused by COVID-19 or if it chooses not to pay now for any other reason, it will be protected from eviction for non-payment up to 30 June 2020 (or later if extended).  

What options are available to tenants who can pay this quarter's rent but are concerned about the next quarter?

As currently drafted, the prohibition on evictions lasts until 30 June 2020 only.  The Coronavirus Act 2020 does give the Government the power to extend the period of the prohibition, but there is no certainty that this will happen. This means that tenants who do not currently have cash-flow problems, but foresee future problems, may choose not to pay their rent now in case the prohibition is not extended.  However, tenants who choose not to pay their rent, need to be aware that other enforcement actions for non-payment remain available to landlords now and that after 30 June 2020 (or later if extended) landlords will have the right to forfeit for this non-payment (for more on this, see below); this means that a tenant's best option may still be to agree new payment provisions with its landlord.  

If after the prohibition expires on 30 June 2020, the tenant still hasn’t paid the rent due on the March quarter day (or any other day up to 30 June 2020), can a Landlord  forfeit or re-enter the property for that act of non-payment?

Non-payment of rent is usually a "once and for all" breach, which means that if the landlord waives the right to forfeit in respect of a rent payment, it cannot forfeit the lease for that breach. However, the Coronavirus Act 2020 provides that up to 30 June 2020, no conduct by or on behalf of a landlord, other than giving an express waiver in writing, is to be regarded as waiving a right of re-entry or forfeiture for non-payment of rent. It seems that this means that the landlord will be able to forfeit at a later date for non-payment of rent in the period up to 30 June 2020, but subject as usual to the tenant's right to relief from forfeiture.  We expect that in these circumstances the Courts will be keen to be forgiving to tenants.

Are there any other enforcement options immediately available to landlords if a tenant fails to pay sums due?

Other actions for non-payment are not prohibited. This means that if the tenant does not pay sums due, for example this quarter's rent, a landlord may choose to:

  1. Draw down from a rent deposit to recover the arrears; 
  2. Serve a statutory demand on the tenant, which requires payment within 21 days, failing which it may institute insolvency proceedings against the tenant (although it is not clear currently how feasible it will be to issue proceedings in Court);
  3. Recover rent arrears and other sums due under the lease from any guarantors or former tenants under the lease either by way of a contractual guarantee or under the privity of contract rules; and/or 
  4. Pursue the rent arrears via the Commercial Rent Arrears Recovery process.  

According to the Coronavirus Act 2020, none of these actions would be regarded as waiving the landlord's right to forfeit for the original non-payment of rent, so after expiry of the prohibition period on 30 June 2020 (or later if extended), the landlord could seek to forfeit for these same sums, subject always to the tenant's usual right to relief from forfeiture. 

Of course, there may be many reasons why a landlord would not choose to pursue these options, not least because in the current climate its actions would prove unpopular; in these circumstances, it is always open to the landlord to come to a voluntary agreement with the tenant on how the arrears might be paid.

Does the prohibition still apply if, due to COVID-19, a tenant has already agreed or is about to agree some kind of voluntary rent concession with its landlord, for example it has agreed to pay its rent monthly in advance instead of quarterly? 

The prohibition applies regardless of voluntary arrangements between landlord and tenant.  This means that, for example, if a tenant had agreed to pay its rent monthly in advance from now for the next 6 months, if it failed to make any of the monthly payments up to 30 June 2020 (or later if extended), its landlord could not evict it for this non-payment during the period up to 30 June 2020 (or later if extended).  

It is a condition of a tenant's break right that the tenant is up to date with all payments, does the prohibition mean that the tenant does not have to comply with this condition if it wants to terminate its lease?

No, regardless of the prohibition, the tenant must comply with the conditions of the break right so it should pay all sums due.

Does the prohibition have any effect on forfeiture proceedings that have already started?

Yes, the Coronavirus Act 2020 includes provisions to deal with the situation where court proceedings for non-payment of rent are (or have been) commenced before the legislation comes into force.

For the High Court, where proceedings commence before the legislation comes into force but the court has not yet made a possession order, the court cannot make an order which requires possession before 30 June 2020 (or later if extended). Where the court has already made an order which requires possession in the period up to 30 June 2020 (unless the tenant complies with specified requirements), if the tenant applies to vary the order, the court, when dealing with the application, must ensure that the tenant doesn't have to give up possession before 30 June 2020 (or later if extended).

For the County Court, where proceedings are commenced before the legislation comes into force but the court has not yet made a possession order, the court cannot make an order (under s. 138(3) of the County Court Act 1984) which specifies a possession date which expires before 30 June 2020 (or later if extended) .  Where the court has already made an order under s.138(3) which specifies a possession date which expires before 30 June 2020 (or later if extended), that date shall be treated as extended to after 30 June 2020 (or later if extended).

A landlord can oppose renewal of a business tenancy under the Landlord and Tenant Act 1954 for persistent delay in paying rent which has become due (Ground b): If a tenant fails to pay rent in the period up to 30 June 2020, could this non-payment be used by the landlord to satisfy Ground b?

No, the Coronavirus Act 2020 provides that any failure to pay rent up to 30 June 2020 is disregarded.

How does the prohibition affect obligations owed by either landlords or tenants to their banks under loan documentation?

The prohibition in the Coronavirus Act 2020, by itself, prevents eviction, but it appears unlikely on current information that it would prevent breaches of any rent related provisions in loan agreements. 

This means that non-payment of rent by a borrower which is a commercial tenant will still be an event of default under loan documentation.

Equally, where a landlord is subject to an undertaking in its loan documentation to diligently collect rent from its tenants, it will be in breach if it fails to do so.

Much, of course, will depend on the drafting of the loan documentation provisions themselves. 

Is any other Government help available for commercial landlords or tenants who are having difficulty making loan re-payments?

For more information on this, see our latest guide: COVID-19 and loan facilities: Update for corporate borrowers during the Coronavirus outbreak, available at Clyde & Co's Coronavirus Information Hub.

What other help can we provide?

We are monitoring the Government's announcements closely. We will, of course, endeavour to keep you up to date.  All our latest advice plus advice from our other business teams is available on Clyde & Co's Coronavirus Information Hub