COVID-19 update: Commercial landlords and tenants

With lockdowns still in place across the country due to the coronavirus pandemic, there is no respite to the challenges facing the commercial property sector. Hayley Bamber and Abbie Seed, from Harrison Drury’s commercial property team, outline key considerations for landlords and tenants including what options are still available to them at the close of 2020.

On 25 March 2020, the Coronavirus Act 2020 (CA 2020) received Royal Assent and prevented landlords from forfeiting commercial leases on grounds of rent arrears. The moratorium on forfeiture was due to end on the 30 June, 2020 but was extended for a further three months. On 16 September, the Government made a further announcement that forfeiture on grounds of non-payment of rent would be extended at least until the end of 2020.

Simultaneously, the Government increased restrictions on landlords’ use of Commercial Rent Arrears Recovery (CRAR). Landlords are now prevented from exercising CRAR unless an amount of at least 276 days’ rent is due where the notice of enforcement is given on or before 24 December, 2020. This increases to 366 days’ rent where notice of enforcement is given on, or after 25 December, 2020. A minimum of just seven days’ rent was required before the COVID-19 pandemic. This restriction also applies until the 31 December, 2020 and may be extended.

This will come as a blow to landlords, as the moratorium will apply to both their September and December quarter rent days, meaning that subsequent financial difficulties could well go on into the new year, with no certainty as to when normal practice will resume.

Encouraging landlords and tenants to work together

While the extension is far from ideal, the Code of Practice for commercial property relationships published on the 19 June, 2020 will continue to apply. Landlords and tenants are encouraged to work together collaboratively to find temporary, and where possible sustainable, arrangements outside of their existing leases to create a shared recovery plan.

As frustrating as it may be, agreements can be reached to recover the arrears in a way that works well for both parties. For example, parties may agree and negotiate the terms of a rent deferral agreement. Alternatively, it is generally possible to draw on a rent deposit where relevant amounts are overdue and terms agreed for replacement of the amount withdrawn. Landlords will need to check the terms of the specific deposit deed for details of requirements and limitations.

Tenants should bear in mind that rents will continue to accrue, as will interest on arrears (where chargeable under the lease). The CA 2020 provides for landlords demanding rent without waiving their right to forfeit once the moratorium on forfeiture is lifted. This means that, come 1 January, 2021, tenants are at risk of their leases being forfeited, without prior notice, if agreements are not reached.

In the meantime, landlords in pursuit of rent arrears may, until 31 December, 2020, rely on claims against guarantors and debt proceedings brought through county courts or the High Court.

Take action now and make sure to seek professional advice

Now is the time for tenants to initiate conversations with landlords if they have not done so already, and to put in place rent deferral agreements/payment plans, to demonstrate to landlords that every effort is being made to repay the rent arrears. If trust and understanding develops between the parties, a landlord may be more inclined to allow a tenant to repay over time, rather than exercising more draconian measures.

Relationships can be fraught, with tenants struggling to meet their financial obligations under their leases, and as a result, landlords struggling to meet their own financial commitments. It is important that landlords and tenants seek advice earlier rather than later, before these relationships may turn sour, and to ensure that they do not inadvertently enter into an agreement that may constitute a variation of the lease itself. Where agreements are reached between landlords and tenants, it is also essential that these agreements are properly documented before the end of 2020.

The commercial property team at Harrison Drury can provide advice on the options available to maintain landlord and tenant relationships. We can also assist with any negotiations and preparation of agreements. Our commercial property team can also provide advice on matters such as rent deposits, recovery of rent from guarantors, rolling rents, lease renewals, break notices and debt claims.

For more information on the current rules relating to landlord and tenant issues during the COVID-19 pandemic and how we can assist you, please contact the Harrison Drury commercial property team on 01772 258321.