Q: The March quarter rent is due but the tenant cannot afford to pay – what action can the landlord take?
A: In its latest bill, the government has confirmed that commercial tenants who cannot pay their rent because of COVID-19 will be protected from eviction. No business will be forced out of their premises if they miss a payment in the next three months.
Many landlords and tenants are already having conversations and reaching their own voluntary arrangements about upcoming rent payments. This will need to be actively monitored given that rent will still be payable after this initial three-month period.
It will be necessary for tenants and landlords to continue engaging in dialogue to assess the cash flow of the business and any further support that will be needed.
Q: What if the tenant cannot pay the rent after this 3-month period?
A: Even after the 3-month period (subject to monitoring and/or an extension) landlords are unlikely to have any interest in forfeiting the lease. This is because they are unlikely to be able to re-let the premises.
There may be an exception to this if the premises have long term development potential and so a landlord make look to take advantage of the situation to re-possess.
Rent will fall due on the next quarter date, usually whether formally demanded or not. Most leases do not allow suspension of rent and will provide that rent is payable without any deduction or set off.
The usual remedies for non-payment of rent include forfeiture, using bailiffs to seize goods, statutory demands and winding up petitions, debt actions, claims against guarantors and calling on rent deposits.
To avoid the landlord taking action, it is likely that a tenant will look for a rent holiday or concession. If this is agreed, it will need to be documented properly. Again, the key is for landlords and tenants to engage in sensible dialogue.
Q: Will insurance cover business interruption or loss of rent?
A: Landlords and tenants should review their insurance policies to identify whether there is any potential cover for business interruption or loss of rent. Most policies should cover financial loss as a result of disruption due to enforced closures.
Each case will need to be considered on its individual basis and subject to the wording of the insurance policy. You should consult your professional advisers.
Q: What arguments may a tenant look to raise?
A: Force Majeure:
· It is unlikely that the lease will provide for a force majeure clause or that such 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.
Frustration (i.e. that it has been impossible to perform the lease):
· This is unlikely to be successful given the courts restrictive approach, as evidenced in Canary Wharf v European Medicines Agency in which EMA unsuccessfully contended that following Brexit, their lease would be frustrated.
Derogation from grant:
· This is also unlikely to succeed as businesses have now been closed as a result of government guidance.
If the situation changes and the government guidance is no longer to enforce closures, it may be that tenants will seek to raise these arguments.