This is an unprecedented time for everyone and no doubt you will be finding tenants approaching you to discuss rent payments (seeking rent concessions/rent holiday) or perhaps even surrenders of their lease. Following the Coronavirus Act 2020 (“the Act”), tenants may be thinking that they do not have to pay the rent for the next 3 months. That is not the case but for now you cannot take steps to forfeit the lease for non-payment of rent.
This is a brief consideration of some questions you may be asking yourself and some practical tips on what to do over the coming months. As you will appreciate, things are continually changing and the situation will need to be monitored pending government guidelines. For specific legal advice please do not hesitate to speak with your usual DJB contact, or contact Madeleine Davitt.
The tenant cannot pay the rent – what can we do?
- Can we forfeit the lease?
No. You cannot now forfeit the lease for non-payment of rent (rent includes service charges, insurance and interest). There is a moratorium on forfeiture until 30 June 2020 (section 82 of the Act). This may and is likely to be extended if the situation has not improved and it is considered that businesses need more time.
The moratorium does not (a) stop rent accruing or (b) prevent a right of re-entry arising. During the period the rent remains unpaid, a right to re-enter will arise but you will not be able to enforce it. Simply because steps have not been taken by the landlord to enforce that right, it will not be regarded as waiving the right to forfeit. However, the right can be waived by other means such as an act which recognises the continuation of the lease such as demanding the June quarter rent, accepting part payment, drawing down on the deposit etc. It is important that if you are considering forfeiture as one of the potential remedies open to the landlord, that steps are taken not to waive the right.
When the moratorium ends, right of re-entry which arose during the moratorium, can be enforced provided it has not been waived. However, before exercising the right you will want to consider whether or not you can re-let the premises as there could potentially be empty rates liability once you have retaken possession . If you think that there may be potential to redevelop at some point in the future, you may wish to recover the premises now.
The Act does not stop you from exercising the right to forfeit the lease for another reason, such as breach of repairing, alienation or user obligations. However, enforcing such a right will be difficult in the current climate. Forfeiture by re-entry will be difficult in the current lockdown period. Forfeiture by issue of proceedings will be difficult as Courts are only prioritising certain claims. A court may also be minded to grant relief from forfeiture at least until the end of the relevant period (June 2020) as practically, it would be difficult for a tenant to vacate premises during a lockdown period.
- Can we draw down from the rent deposit?
Yes, you may wish to agree to draw down on a rent deposit to ease the tenant’s cash flow issues. You should ensure that you agree provisions for the account to be topped up including a date for this. Of course this will only provide interim and limited relief.
- Can we serve a statutory demand/issue bankruptcy or winding up proceedings?
Yes, you can serve a statutory demand as a first step towards threatening a winding up petition. However, you should bear in mind (1) the financial position of the tenant and whether you wish to incur costs of taking action if ultimately the tenant cannot pay; (2) do you want to be seen taking these steps in light of the government’s stance that businesses need time to pay; (3) in the event that you do wish to proceed down this route, the courts are only prioritising certain matters and bankruptcy/winding up petitions are not currently considered matters of priority It is therefore unlikely this will be heard before the end of June.
- Can we recover arrears using CRAR?
Yes. You can enter the premises and seize assets of the tenant of an amount equivalent to the rent owed. However, is this practical in the current climate? In particular, you will require a Certified Enforcement Agent to carry this out. They have to visit the premises and identify assets to be seized after notice is provided. This may not be possible as all non-essential business premises are closed.
- Can we issue a debt claim?
Yes, you can issue a claim for the arrears owing but again, courts are only prioritising certain matters and this is not likely to be a quick process. In any event, you are unlikely to recover the arrears if the tenant has no income nor recover the costs of proceedings.
- Can we pursue a former tenant?
If the lease was granted before 1 January 1996, you may be able to pursue a former tenant for the arrears. To do so you can serve a section 17 notice but this must be served within 6 months of the debt having arisen. If the lease was granted after 1 January 1996 you will only be able to pursue a former guarantor if they have entered into an Authorised Guarantee Agreement (AGA).
- Can I pursue a guarantor?
Yes, you can enforce a guarantee – however, consider whether they are financially sound. The same concerns about pursuing claims through statutory demand and issuing money claims set out above apply.
What do we do if the tenant approaches us to surrender the lease?
You should be careful about agreeing a surrender of the lease without taking advice. If you accept a surrender you will become liable for the business rates. You should therefore consider whether you wish to have an empty space rather than keep the tenant, particularly if the tenant is a good covenant that may be able to recover quickly once the lockdown is over. You should engage with your tenant to discuss whether they will be willing or able to pay the future rent.
How do we respond to any arguments from a tenant regarding potential counterclaims?
- The tenant is arguing that there is a derogation from grant
If you have shut the premises, the tenant might seek to argue that you have breached its right to quiet enjoyment of the premises or derogated from grant i.e. that you acts have made the premises unfit or unsuitable for the purpose for which they were let. The tenant could seek compensation equivalent to all the rent and any other charges, plus loss of earnings if they could potentially have traded. Where businesses have been closed as a result of government guidance and so beyond landlord’s control, this argument will be less likely to succeed and in any event tenant will have to establish loss flowing from the landlord’s actions.
- The tenant is arguing that force majeure applies
It is unlikely that the lease provides for a force majeure clause and in the event that it does, it is unlikely that such a clause will cover Covid-19 specifically. If it does, you will need to consider whether and how it has impacted on the tenant’s performance of the lease; whether the tenant has used all of its reasonable endeavours to mitigate the consequences; and that the notice requirements have been satisfied. This is a high burden on the tenant seeking to rely on the clause.
- The tenant is arguing that the lease is frustrated
The contract will be frustrated if an event occurs that renders it impossible to perform an obligation or the obligation is radically different to that originally envisaged when the contract was made. It is a very high bar for the tenant to prove as can be seen in the recent case involving European Medicines Agency and its landlord following Brexit. It seems unlikely that a tenant could successfully argue that its lease has been frustrated, particularly if any period during which it is unable to occupy the premises is only temporary.
What should we be doing now?
Whilst there is action you can take against a tenant (save for forfeiture until 30 June) the recommended approach at the moment is to speak to your tenants and work out whether there is a way to work through this. You will want to consider the next steps sooner rather than later and in plenty of time ahead of the next quarter date.
If you have a large portfolio of tenants, you will want to consider your strategy when the next tranche of rent payments are due. Don’t forget that interest will all be payable on any missed rent payments. You may wish to compile information to identify those tenants that are worth pursuing or that you wish to retain. For example, identify where you hold rent deposits or where you can pursue former tenants or guarantors and also review company accounts for those tenants that may not survive a substantial period of lockdown.
If you do agree any rent concessions or holiday, any such agreement should be documented in clear terms reflecting what has been agreed and should include provisions requiring any government assistance given to the tenant to be declared to the landlord with reimbursement to be made where relevant.