The Government introduced the Coronavirus Act 2020 at the end of March of this year. Broadly speaking, the effect of section 82 of this Act on landlords was to remove the landlord’s sanction for taking any action against tenants for unpaid rent. Consequently, rent arrears have accrued.
Market research has estimated that on the June quarter day only about 25% of Landlord’s received the rent due in full but by the end of August, approximately 75% of rent had been paid. This still leaves a quarter of rent being unpaid.
Initially, landlords were prevented from taking any action for rent arrears against tenants until 30 June 2020. This was extended to 30 September 2020 and has now been extended until 31 December 2020.
The effect of section 82 of the Coronavirus Act is to defer the Landlord’s right to take action to enforce payment of rent. Rent is still due and must be paid. Rent is regarded as being any payments due under the lease so includes insurance and service charges. In circumstances where a Landlord has a tenant whose business and income stream has been adversely affected by the Covid 19 Pandemic, and the Landlord is prevented from using the threat of forfeiture to enforce payment, many commercial landlords are finding that rent arrears continue to accrue. In this situation, what options are available to a commercial landlord?
The Government has issued guidance to landlords and tenants to work together to deal with the increasing level of rent arrears. Suggestions have been made to agree payment plans allowing payment of the rent over a longer period of time, to suspend charging interest on late rent payments even reducing rent so that the financial burden of the pandemic is shared between landlord and tenant. As commercial landlords cannot take enforcement action in respect of rent arrears, particularly as landlords are not permitted to forfeit a lease for rent arrears, there is an incentive for landlords to work with tenants.
Landlords still need to exercise some caution when negotiating with tenants. Currently, a landlord is prevented from forfeiting a lease for non-payment of rent until after 31 December 2020. This begs the question: how should landlords act and communicate with their tenants now and will that be different from 1 January 2021? Landlords need to balance the pros of having a tenant who is paying some rent against the cons of having an empty property and being responsible for the business rates, insurance, and maintenance of that property. There is also a more technical consideration for landlords to be aware of.
Forfeiture not related to rent arrears
One of the more technical aspects of the Coronavirus Act 2020 relates to the options of forfeiting a lease for reasons other than rent arrears, such as failing to repair and maintain a property, for sharing occupation with another person/company or breaching the permitted use for the property. Ordinarily in this situation, the landlord’s legal advisers warn against ‘waiving the right to forfeit’. Typically, this would involve ensuring that rent is not demanded or accepted by the landlord because to do so would be an act that indicates the landlord accepts that the lease continues and so loses the right to forfeit the lease. This position is altered by the Coronavirus Act. To what extent it is altered is debatable.
As landlords are being encouraged to work together with tenants, they are also being protected against the prospect of losing their right to forfeit a lease for a limited period. Currently, the period is until 31 December 2020. If a landlord makes a demand for rent or agrees a payment plan for the rent to be paid from now until 31 December 2020 then this will not mean that a landlord has given away his right to forfeit the lease for the rent arrears. Does this protection from losing the right to forfeit for rent arrears also extend to other breaches? Unfortunately, the legislation is unclear.
A landlord can only waive or give away its right to forfeit the lease based on rent arrears if it states that in writing. From 1 January 2021, any demands for rent made by a landlord up to and including 31 December 2020 could be disregarded. On 1 January 2021, the landlord could simply serve a Section 146 Notice demanding payment of all rent arrears within a reasonable period, say 14 days, after which it could peaceably re-enter the property and forfeit the lease in doing so.
As landlords can still elect to forfeit a commercial lease for other breaches of covenant within that lease how can the acceptance of rent or a demand for rent not amount to a waiver of the right to forfeit for other breaches? Ordinarily, a landlord could be deemed to have elected to lose its right to forfeit the lease for any of those breaches if it accepts rent after those breaches have occurred. Potentially, a landlord can accept rent until 31 December 2020 and still forfeit a lease for other breaches such as changing permitted user or failing to maintain and repair the property. This is by no means clear in the legislation.
This is new law and law that has not been tested in the Courts. The Coronavirus Act is now proposing that the landlord can potentially treat the lease as continuing and to accept payment of rent but at the same time, reserve its position and choose to forfeit the lease for other breaches of that lease. Practically, forfeiting a lease for breaches other than rent arrears is usually more difficult. Forfeiting a lease by peaceable re-entry based on rent arrears after service of a s. 146 Notice may be easier, quicker, and less expensive in January 2021 than forfeiting a lease now for other breaches of lease.
If a landlord wants to regain possession of its premises, it can now do so as the moratorium on issuing those proceedings expired on 20 September 2020. There is a huge backlog of work in the Courts and it is widely reported that the Courts are in difficulty in processing the large volume of work in connection with possession proceedings. Landlords must consider the quickest and most effective way of regaining possession of property. If landlords are permitted to forfeit a commercial lease based on rent arrears from 1 January 2021, it is feasible that this may offer a quicker and more cost effective route of regaining possession of those premises rather than issuing possession proceedings now based on rent arrears or other breaches of lease. However, landlords must also bear in mind that the Government may extend the period which prevents a landlord from forfeiting a lease based on rent arrears beyond 31 December 2021.
Most commercial landlords want to ensure receipt of payment of the sums due to it under the lease and to ensure that the capital investment made into that commercial property is protected. The threat of forfeiture is a tool of gaining compliance from the tenant with lease covenants. In the new COVID era, landlords have to carefully consider the options and benefits available to them in terms of negotiating payment plans with tenants, whether they want to continue that working relationship with the tenant or to take the property back based on rent arrears from 1 January 2021 and what other uses they can put their commercial property to rather than having it empty. Even when forfeiture for rent arrears is permitted from 1 January 2021, the normal sanction of forfeiting a lease may not be a real threat in the COVID era if the demand for commercial premises has also reduced.
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This article was written by Lisa Eastwood, Senior Associate Solicitor in the Commercial Property Litigation at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of October 2020.