Questions from a Landlord's perspective
My Tenant has requested a rent holiday. I am happy to help them with this, how do I do this?
The majority of Landlords and Tenants are working well together to come to an agreement about rent, for example by either changing the rent payments from quarterly to monthly, or deferring rental obligations for a specified period. It is strongly advisable, (but not necessarily essential), to have these arrangements documented in writing. A lease could be varied by a ‘Deed of Variation’ or by a “Side Letter” so that the definition of ‘Annual Rent/Rent’ is changed to allow for a rent free period, followed by increased rent (to make up the shortfall) for the remainder of the lease term. This would not affect the length of the lease term.
If I do not agree to rent-free period and the tenant fails to pay the rent, what action can I take?
In short, unfortunately, practically in the immediate future, a Landlord cannot do much. Some Landlords have been the subject of negative publicity as they chose to take any action against their Tenant’s in this situation and the Government stepped in with new legislation. The Government may legislate further if they feel that Tenant’s and the economy need further assistance. The Court process is currently slow to non-existent in any event.
Tenant who are unable to pay any sums due under their Lease because of coronavirus are now legally protected from eviction / forfeiture (either by peaceable re-entry by the Landlord, or by possession proceedings in the court.) The legislation now means that no business can be forced out of their premises if they miss a payment between now and 30 June 2020. It is extremely likely that this date will be extended by the government in due course.
It is important to note, that although eviction/forfeiture cannot currently take place, Tenants are still and will remain liable for their rent during this period and any default interest provisions in a lease are unaffected. In addition to this, tenants are not protected from possession being sought due to other breaches of a lease, such as disrepair, however, under the current climate it is unlikely these cases will progress quickly in court.
Can I make my Tenant insolvent as they have not paid rent?
Winding Up Petitions and Statutory Demands
There are currently restrictions on a Landlord’s ability to pursue certain enforcement action against a Tenant, such as by temporarily banning the use of statutory demands and winding up petitions presented until 30 June 2020 (again this date is likely to be extended), where a company cannot pay its bills due to coronavirus. 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.
Although, this is still very new, it is not clear if a business which is clearly surviving but fails to pay their rent, can have a Statutory Demand served on them e.g. if your Tenant was a national branded supermarket and they continued to trade as normal during the pandemic, it may be arguable that they have not been affected by the Coronavirus and should be able to pay their rent.
Commercial Rent Arrears Recovery
Commercial Rent Arrears Recovery (CRAR) is a statutory procedure which allows Landlords of commercial premises to recover rent arrears by taking control of the Tenant’s goods and selling them in order to pay off the debt.
This has not been exercised since March 23rd 2020 due to social distancing concerns, but some Landlords have started the process by using Bailiffs to serve the initial notices.
A Landlord can only use CRAR if they can prove more than 90 days’ worth of rent arrears. As such, this is likely to take a lot of the immediate pressure away from Tenants.
Questions from a Tenant’s perspective
I am really struggling to pay my rent. What should I do?
The best starting would be to discuss with your Landlord as soon as possible. Many Landlord’s will see that having a Tenant in the property is better than having an empty property and having to worry about finding a new tenant, so they may be willing to help under the current the circumstances.
A Tenant may be able to agree to a rent free period for a time, with either the term of the lease being extended by a number of months or with the shortfall in rent over this period being spread over the remainder of the lease term e.g. paying a higher annual rent once the rent-free period ends. As above this can be dealt with by a “Deed of Variation” or a “Side Letter”..
Can I terminate my Lease?
Unfortunately, no you cannot. Unless a Lease has a break option which is due and the Tenant can comply with all the requirements to exercise the break option, a Tenant is tied in until the contractual end date of the term of the Lease.
If there is a break option, the conditions need to be considered carefully and adhered to correctly. The conditions of a break clause are usually very strict and even a day’s late notice can invalidate a break clause.
If both parties agree, you can enter into a Deed of Surrender. However, depending on the term of years left, if a Landlord does agree to a Deed of Surrender, it is likely that they will want payment to be the equivalent of some of the rent which they would have received until the end of the contractual term.
It is possible, in theory to legally ‘frustrate’ a Contract, which can happen when an event occurs which significantly changes the nature of the outstanding contractual rights/obligations from what the parties could have reasonably contemplated at the time the Lease was entered into. However, a change in circumstances which make the contractual obligations more difficult or expensive to carry out, is not enough. A business being interrupted for a few months is unlikely to lead to frustration of a lease. Each case will depend on its specific facts and the specific wording of the clause in the lease, but it the longer the lease term, the smaller the percentage of the term that will have been affected by the coronavirus, and the less likely it is that the lease will be frustrated.
On the other hand, if the lease term is short and most of the term has been affected by coronavirus, then there may be greater chance of arguing for frustration.
It is important to note that frustration, if successful, would end the contract entirely. Therefore, a Tenant who wishes to use the leasehold property again at a later date and just wants a break from obligations until the coronavirus situation gets better should not consider arguing frustration.
In short, there are still a lot of uncertainties and with the Government currently amending legislation on an almost daily basis, we do not know what further changes will occur and how these will affect a Commercial Landlord or a Commercial Tenant. At this stage the best advice to all is to keep communication lines open, both with each other and with your financial advisors, property agents and legal advisors.