As part of the government’s response to the coronavirus pandemic new extensive laws have passed through Parliament providing wide-ranging measures to help deal with the impact of the virus. The Coronavirus Act 2020 became law on 25th March.
The Act seeks to provide security for tenants of commercial property who are struggling to pay their rent. Whilst tenants have welcomed the provisions which restricts a right of re-entry or forfeiture for non-payment of rent during this crisis, this is actually a targeted relief and perhaps not as far reaching as some might think. The provisions are limited in their scope, and while tenants might feel that there will not be any repercussions should they not pay their rent now, there are a number of factors that need to be kept in mind and which might have unintended consequences further down the line. Moreover, the provisions only apply up to 30th June 2020, after which time the normal position will resume. Unlike the provisions concerning residential property, there does not appear to be an immediate power to extend the deadline beyond 30th June 2020. As such tenants should consider the following points when deciding whether or not to pay their rent now.
- The limitation of the right of re-entry and forfeiture refers only to non-payment of rent. Whilst rent is defined in the Act as any sum that a tenant is liable to pay under a relevant business tenancy, a landlord retains the right of re-entry and forfeiture for any other breaches. A landlord would of course have to serve a section 146 notice on the tenant in respect of those other breaches before taking action to forfeit the lease. As such the tenant would have a reasonable period of time to remedy the breach complained of. However, tenants should not think that there is a total moratorium on any enforcement proceedings for any breach.
- Should a tenant not pay their rent now, interest will accrue on the unpaid rent in accordance with the terms of the lease. There is nothing in the Act that says this interest would not be due. As such both the rent and the interest will remain payable, increasing the debt owed to the landlord.
- Unless the landlord has expressly waived a breach by the tenant for the non-payment of rent, the landlord will retain the right to forfeit post 30th June 2020.
- In light of this, landlords will in certain circumstances be able to re-enter the property and forfeit the lease, or demand the rent is instantly payable with interest. That said one would hope that landlords can see that such action may not make commercial sense.
- There is no express restriction on the landlord’s ability to serve a notice under the Commercial Rent Arrears Recovery protocol. Therefore, a landlord could, albeit that it may be unlikely, issue such a notice, which is a pre-condition to instructing bailiffs to recover unpaid rent.
- After 30th June 2020, landlords will be entitled to recover their costs incurred in enforcing for the late payment of rent as set out in the lease. Again, this could increase the debt owed to the landlord. That said many landlords may take a balanced commercial view of this and not incur such costs, or not seek to recover them.
- The Court’s powers to order possession are not restricted totally. It would seem the Court can make an order for possession, but that order cannot take effect until after 30th June 2020. However, given the current backlog in Court proceedings, it is highly unlikely that any such claim could be dealt with in this period anyway.
Overall, although the government has taken a positive step in providing short term protection, if tenants delay the payment of their rent, it is vital that tenants keep in mind that their liability for the rent still accrues. Furthermore, there could be additional financial consequences, such as interest and costs, if rent is not paid on time and a landlord can still enforce for any other breach of the lease.
There is another matter, which could have a substantial financial impact on tenants as a result of the current situation, that is not dealt with by this Act, namely the lawful exercise of a break right. Most tenant break rights have certain pre-conditions attached to them that must be strictly complied with for the tenant to lawfully operate the break. These generally require the provision of vacant possession and the payment of the rent by the break date, and case law supports the contention that even the most minor breach of these pre-conditions renders the break inoperable, meaning the tenant is held to the lease for the remaining term or until the next break date.
In the current climate, with tenants withholding or not being able to pay the rent and restrictions on the access to their property meaning they are not able to arrange for their furniture, fixtures and fittings to be removed, landlords will be able to hold tenants to the lease, if neither the rent has been paid, nor vacant possession provided by the break date.
In some instances the lease will also require the tenant to hand the property back in the state of repair and condition required by the lease. Again, in the current circumstances the tenant may not be able to comply with this, so the landlord can again argue the pre-condition has not been complied with and that the lease continues.
The financial ramifications of this could be serious as it is reasonable to assume that the tenant might also be under a contract to take space in the new building, leaving the tenant with the liability for two premises, not just one.
If a tenant has an upcoming break then a discussion with their landlord needs to happen as a priority. First on the agenda should an agreement by the landlord to waive compliance with any such pre-conditions. Next, the parties need to come to an alternative arrangement to end the lease and to hand back the property as soon as is possible. One option might be to agree a surrender but a landlord does not have to agree to this and is currently under no obligation to act reasonably when considering such a request. An alternative may be to agree a variation to the break date to provide for the property to be handed back at a later date. Consideration will need to be given to rent payments during this period.
It is incumbent on both landlords and tenants at this unprecedented time to communicate and work together, keeping in mind that it is in the interest of all parties to maintain a good working relationship. Ideally, rather than just withhold rent, a tenant should talk to its landlord about the payment of rent and come to a documented agreement about how and when the rent will be paid and whether interest is to be paid and, if so, when. Tenants are well advised to avoid simply not paying the rent and relying on the provisions of the Act to protect themselves against forfeiture or additional costs between now and 30th June 2020.