What has been the impact of COVID-19 across the commercial property sector?
Most tenants have been asking their landlords for some form of assistance with their rent at least temporarily. Some have asked to pay rent monthly, some have asked for a deferral, and some have asked for rents to be waived entirely for the time being.
As there will not be any specific contractual right to allow a tenant to do this in most leases, it has depended on the attitude of the individual landlords to such requests. Legal arguments have however been raised in support of some tenants’ positions, based on the doctrine of frustration and the drafting of some rent abatement provisions.
Who has been hit harder – landlords or tenants?
Landlords and tenants have probably been hit equally as hard. Particularly in the retail and leisure sector, tenants have seen their revenues collapse and, as a result, their ability to pay their rent has become a major issue.
Equally, landlords rely on the income from tenants to operate and to service debt. Landlords are not always the party with the strongest financial position.
If tenants are also struggling to pay service charges, then that will directly affect the ability of the landlord to fund ongoing maintenance programs or run essential services for a property.
Does a landlord have to waive rent during the COVID-19 outbreak?
Landlords are under no legal obligation to waive rent, despite encouragement to do so from the Government. Tenants are obliged to continue to pay rent in accordance with the terms of their lease. However, it has been seen that landlords have entered into arrangements such as rent holidays and rent concessions with tenants. Avoiding the insolvency of a tenant with a business which was sound prior to the pandemic is often being perceived as mutually beneficial.
How has the Government responded in relation to business tenancies?
Coronavirus Act 2020
Under the Coronavirus Act 2020, landlords are unable to forfeit a lease by peaceable re-entry or pursue possession proceedings if a tenant fails to pay rent (or other sums, including service charges and insurance rent) until 30 June 2020. These dates are subject to review and may be extended.
New Practice Direction 51Z effectively extends this temporary protection to cover forfeiture proceedings if the tenant has breached other terms of its tenancy.
Corporate Insolvency and Governance Bill 2020
Last week the Government has announced a temporary ban on landlords issuing winding up petitions against commercial tenants unable to pay their bills due to COVID-19.
The extent of these restrictions is still unclear but may also prevent landlords from issuing statutory demands, which can be served where a corporate debtor owes £750. If the debt is not paid within 21 days, the landlord creditor can issue a winding up petition against its tenant. Whilst statutory demands should not be used for collateral purposes, in many cases a landlord does not ultimately want its tenant to be wound up, as that could lead to them having to take back the premises, and the procedure is used to put pressure on leaseholders to pay their rent.
Under these new measures, any winding up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented, or winding up orders made, where the company’s inability to pay is the result of COVID-19.
Furthermore, landlords will also be prevented from using commercial rent arrears recovery (the process of taking control of a tenant’s goods often called ‘CRAR’) unless they are owed 90 days of unpaid rent.
These additional measures seem to be a reaction to some landlords putting their tenants under pressure by using debt recovery tactics perceived as aggressive. The Government says that these temporary measures are “designed to acknowledge the pressures landlords are facing while encouraging cooperation in the spirit of fair commercial practice”. By way of balance the Government has also called on tenants to “pay rent where they can afford it” in recognition of the “strains felt by commercial landlords too”.
These measures are to be included in the Corporate Insolvency and Governance Bill but they are not law yet. It is intended that new legislation will be in force until 30 June 2020, but may be extended in line with the moratorium on lease forfeiture for non-payment of rent.
Is a tenant entitled to withhold rental payments in the next three months as a result of the interim measures introduced by the Government?
Unless the terms of the lease allow the tenant to withhold payment of rent, the tenant is still liable to pay the rent and other sums, such as service charge and insurance rent. Although landlords are prevented from bringing possession proceedings in at least the next three months, rent will continue to accrue (with interest) during this period.
As the legislation currently stands, landlords can continue to issue proceedings against their tenancies for payment of arrears. They can also drawdown on rent deposits, pursue guarantors or serve notices on sub-tenants under section 81 of the Tribunals, Courts and Enforcement Act 2007 requiring them to pay their rent to the head-landlord.
How does COVID-19 alter the repairing obligations in a lease?
The emergency measures do not alter a tenant’s or landlord’s existing repair obligations under a lease. Repairs should, therefore, be carried out where necessary if required under the lease.
If a tenant or landlord is unable to meet their repair obligations, we would advise a party to engage with the other party as soon as reasonably possible. There is nothing to prevent a landlord or tenant from bringing proceedings against the other for refusing to comply with their contractual repair obligations.
Landlords can also serve Jervis v Harris notices on tenants where their lease contains the relevant market standard clause, requiring that they be granted entry to carry out repair work, the cost of which can be claimed against the tenant as a debt. Conducting such works during the lockdown may, however, be a practical challenge.
Are landlord and tenants still required to comply with health and safety obligations?
Landlords and tenants still must comply with their health and safety obligations under the law.
When complying with their contractual or statutory health and safety duties, landlords should act in accordance with the published guidance on social distancing and ensure that they take all the necessary precautions to keep safe.
Are landlords obliged to provide additional cleaning facilities during the COVID-19 outbreak?
There is no legal obligation for landlords to provide additional cleaning services due to COVID-19. Some landlords have taken proactive steps to do so (such as providing a deep clean or increasing the frequency of cleaning services) to ensure the safety and wellbeing of their tenants. Landlords who have chosen to provide additional cleaning services need to review the service charge provisions to determine if they can recoup the reasonable costs of these enhanced cleaning services.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.