Landlords and tenants are raising an increasing number of queries following the spread of COVID-19, which has now been declared a pandemic by the World Health Organisation.
We have answered the most frequently asked questions and set out our guidance below.
Although leases often contain similar provisions to each other, it is important to note that all leases are different and each situation will need to be considered on its particular facts.
On 24 March 2020, the government announced measures to protect commercial tenants that cannot pay their rent because of COVID-19, from eviction in the short term. These protections build on the package of measures recently announced to protect those affected by COVID-19, including similar measures to protect residential tenants.
- Protections for tenants
The government has recognised that many landlords and tenants are making voluntary arrangements to preserve tenancies affected by COVID-19, but that more legislative protection is needed for businesses struggling with cashflow and concerned about eviction. These protective measures have been added to the Coronavirus Act 2020 which came into force on Wednesday 25 March.
In effect, the measures will provide that:
- A landlord is unable to exercise a right of re-entry or forfeiture (termination) of a tenancy for non-payment of rent from the day after the Coronavirus Act comes into force (26 March) until 30 June 2020 (the ‘relevant period’). The relevant period may be extended by the Secretary of State. ‘Rent’ includes any sum a tenant is liable to pay under a business tenancy, including insurance rent and service charge.
- For existing litigation based on forfeiture for rent arrears, a tenant cannot be evicted until after the end of the relevant period (currently 30 June 2020).
- Failure to pay the rent during the relevant period cannot be treated by the landlord as persistent delay in paying rent.
- In a residential context
The government has also legislated to increase the notice period that a landlord is required to give to recover possession of a property. Additionally, the Act gives the Secretary of State power to increase the notice period further in the future. Separately, there is also a stay on all existing possession proceedings for 90 days and no new possession proceedings will be issued by the Court for 90 days.
- Further Considerations
It is important to note that these protections effectively offer a rent deferment for commercial tenants currently struggling to pay their rent. Tenants will still be liable to pay any rent arrears after the relevant period. Commercial landlords reserve their right to pursue that rent.
We are seeing that many landlords and tenants are already coming to voluntary agreements for rent holidays, whilst the statutory interventions by the government play catch up. We would advise that any such agreements should be in writing.
The government is also monitoring the impact of COVID-19 on commercial landlords’ cash flow and continues to be in dialogue with them.
- Can a landlord decide to close a property because of COVID-19?
A lease is unlikely to contain express wording that deals with what happens in the event of a pandemic. If a lease contains a force majeure clause (which are now rare), it is possible that COVID-19 could amount to a force majeure event, which may entitle the landlord to suspend or terminate the lease. However, as this would usually require express wording in the provision to that effect, there is no guarantee it would apply. When considering lease arrangements, in simple terms a tenant remains entitled to occupy premises and the landlord remains entitled to receive rent.
- What options are available to a landlord if rent is not paid?
A landlord will usually have the option to forfeit the lease if rent remains unpaid for a certain period. However, in many cases it will often not be in the landlord’s interest to do so as they may not be able to quickly re-let the premises to a new tenant (especially when other commercial tenants are likely to be under the same strain). Therefore, rather than receiving no income from an unoccupied property, a rent suspension or reduction may be preferable. A potential rent concession may be for the frequency of rent payments to be varied or for rent to be paid based on a percentage of turnover.
- Charity Landlords
In the case of a charity landlord that decides to change rent arrangements, they must ensure to act in the best interests of the charity. There is a risk that a charity landlord changing rent arrangements and thereby effectively “gifting” to its tenant may be in breach of its charitable trust and so we would always recommend that a charity landlord takes advice before agreeing to such a step.
- What can a tenant do if it has to close its business or cannot pay rent as a result of COVID-19?
In most circumstances, the best starting point will be a discussion with the landlord (particularly if the parties have a positive relationship) to see if the tenant can be granted a short-term rent suspension or reduction. As discussed above, often it will not be in the landlord’s interests to seek to forfeit the lease. However, it would be pertinent to have any proposed communication between the tenant and landlord reviewed by a solicitor before it is sent.
In some situations, there may be an express rent suspension clause in the lease, but again in the absence of particular wording this may not cover a pandemic. Usually a rent suspension clause only applies in the case of physical damage to the premises. Each lease would need to be considered individually.
Tenants should also check their insurance policies to see whether business interruption is covered, noting that there may be exclusions for circumstances such as pandemics.
For charities, there is also now the package announced by the Chancellor, which may help.
As one would expect, there has yet to be a test case before the Court where it has been asked to rule on the impact of COVID-19 on leases. Until there is such a ruling, careful consideration will need to be given on a case by case basis.
Therefore, we strongly recommend that before taking any action, both landlords and tenants seek formal legal advice.
We are closely monitoring announcements from the relevant authorities and are always available to help you navigate through this difficult time.
- Schools and other educational settings
Schools and other educational settings are encouraged to keep an eye on any updates from the Department for Education (DfE) and Public Health England (PHE) and to contact us for advice.
We have put together a complete list of FAQ's for Schools, please see this here.