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Non-payment of rent due to COVID-19: what are the options for commercial landlords and tenants?

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Grace Mercer works for law firm Thomson Snell & Passmore

The Coronavirus Act 2020 (the “CA”) protects commercial tenants from eviction for non-payment of rent until 30 June 2020. However, it does not remove their obligation to pay rent. Claims for possession as a result of forfeiture for rent arrears that have already begun are suspended and existing possession orders cannot be enforced until after 30 June at the earliest.

The UK government continues to update rules for commercial landlords and tenants and recently announced temporary new measures aimed at safeguarding the UK high street against what Business Secretary Alok Sharma has described as “aggressive debt recovery actions” during these uncertain times.

It is therefore important for both landlords and tenants to enter into dialogue at these difficult times. Landlords should be aware of problems being faced by their tenants and similarly tenants need to recognise that landlords also are businesses and have expenses.

Concessions that landlords could consider include waivers, rent suspensions, and rent deferment with or without accrued interest. The wording of any concession should be clear and unambiguous. This should reflect what has been agreed between the parties for the period in question and, crucially, whether any agreement is intended to vary the terms of the lease. Failure to do so risks storing up problems for the future.

A landlord might decide to apply the rent deposit to cover the next rent payment easing the immediate pressure for both parties and allowing the tenant to pay balance at a later date. Whilst this would benefit both landlord and tenant in the short term, there is a risk that the landlord is left with little security should the tenant default in the future. Pursuing guarantors for rent arrears, if available, is likely to be more appropriate in most situations.

Extending leases and therefore extending the landlord’s income period could also be a good way of compensating a landlord for any lost or deferred rent. However, care needs to be taken here to ensure all formalities are followed to avoid problems with the Land Registry, Stamp Duty Land Tax being triggered for the tenant, and inadvertently granting a new lease which has security of tenure for the tenant if the lease was previously excluded from the protection of the Landlord & Tenant Act 1954.

A landlord is entitled to take a tenant’s goods from premises as security for unpaid rent. This process is called Commercial Rent Arrears Recovery (“CRAR”). However, secondary legislation is now being enacted preventing landlords from using CRAR, unless 90 days or more of unpaid rent is owed. Furthermore, it unlikely that landlords will seek to exercise CRAR as this cannot be done if premises are closed and very few enforcement agents are available to attend.

Many landlords have been threatening action by serving statutory demands on tenants, as precursors to serving a winding up petition or starting bankruptcy proceedings, to pressure them to pay rent. However as above, the new measures suggest a temporary automatic voiding of statutory demands and winding up petitions to prevent the use of what are perceived by some as “aggressive debt recovery tactics”. Despite this, the courts will continue to have some discretion as to whether statutory demands can be lawfully presented or winding up order made by reviewing the cause of the debt, namely if it is COVID-19 related.

Landlords are still able to commence court proceedings for recovery of rent however these are likely to be slowed down because of the implementation by the courts of the government’s new measures which continue to be reviewed. It is also worth highlighting that all ongoing housing possession actions have also been suspended for a period of 90 days. This means that neither cases currently in the court or any about to go in the system can progress to the stage where someone could be evicted. At present, these rules continue until 30 September 2020 but can be extended.

Tenants should maintain open and honest discussions with their landlord and whilst a tenant’s lease may not require the tenant to give the landlord information about their financial situation, it may help achieve a mutually beneficial and workable outcome. A landlord should inform their tenants of any schemes that may assist with their rent payments as it may be the case that they are not aware of these. These include small business grants, job retention schemes, deferral of VAT payments and income tax payments, business rates holiday for retail and leisure.

On the whole, the government is encouraging landlords and tenants to work together through this difficult and unprecedented time which may benefit in the long term, relationships between landlord and tenants.