Frequently asked questions
This note deals with some of the questions we have been asked by landlord clients in light of the Covid-19 pandemic. A separate note for tenants can be found here. This note is necessarily generic in nature, and reference should always be had to the specific terms of the lease in each case.
The situation is constantly evolving and, whilst it is intended that this note will be updated and extended as information comes to light and further issues emerge, you should take specific legal advice for the latest position. The note applies to the law in England only.
1. How can I deal with a request for a rent holiday?
Many landlords have already negotiated 'rent holidays' with tenants. Whether or not to grant a rent suspension remains a matter for landlords' discretion. Key considerations for landlords to have in mind include:
- How long will the suspension last? Will there be any option to renew the suspension?
- Is the obligation to pay rent to be suspended entirely or simply deferred to a later date? If deferred, will interest be payable?
- Can the landlord terminate the suspension?
Any agreement reached should be formally documented, for example in the form of a side letter, so that both parties are clear on their obligations and the agreement can be expressed to be personal to the parties. Usually, side letters will include a provision that the agreement is a temporary waiver of obligations under the lease, and not a variation of its terms. This ensures that the lease remains enforceable.
2. Should I serve demands if tenants fall into arrears?
If no rent holiday has been agreed and a tenant falls into arrears, landlords should consider whether they intend to forfeit the lease (discussed below). Landlords need to take care before demanding or accepting sums under the lease. If a right to forfeit has arisen, service of a rent or service charge demand might waive that right. That could significantly restrict a landlord's ability to recover possession if required: if rent is payable quarterly, the landlord could be left waiting months before the next opportunity to forfeit arises.
The Coronavirus Act 2020 came into force on 25 March 2020. Consequently from 26 March 2020 until 30 June 2020 no conduct by or on behalf of a landlord, other than giving an express waiver in writing, is to be regarded as waiving a right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent. However, there may be argument about what might constitute an express waiver in writing and so landlords who wish to preserve their right to forfeit after the ban should exercise caution. Very broadly, this means not demanding or accepting sums due under the lease, or in any other way acknowledging the existence of the lease, after the right to forfeit has arisen.
3. Can I forfeit the lease?
Under the Coronavirus Act 2020, a landlord may not enforce a right of forfeiture for non-payment of rent in relation to a business tenancy between 26 March 2020 and 30 June 2020. That period may be extended.
In relation to rent arrears forfeiture court proceedings that have already started, the court may not order possession of the land to be given before 30 June 2020.
Rent includes any sum a tenant is liable to pay under a relevant business tenancy and therefore almost certainly includes service charges and insurance rent.
There may be a limited number of tenancies of commercial premises that do not fall within the ban but specific advice needs to be taken if you propose to forfeit during the period of the ban.
There is currently no prohibition on forfeiting for other breaches. A forfeiture notice under section 146 of the Law of Property Act 1925 must be served before seeking to forfeit for any breach other than rent arrears.
4. Can I serve a statutory demand?
As it stands, there is nothing in coronavirus legislation to prevent a landlord from serving a statutory demand as a precursor to winding-up proceedings.
However, on 23 April 2020, the government announced that it is to introduce temporary new measures to "safeguard the UK high street against aggressive debt recovery actions during the coronavirus pandemic".
Amongst other things, the draft Corporate Insolvency and Governance Bill will prevent the presentation of a winding up petition based on a statutory demand served between 1 March 2020 and 30 June 2020. Additionally, creditors must prove – regardless of whether and when a demand was served – that coronavirus has not had a financial effect on the company.
This part of the Bill, which is expected to come into force very soon, will be treated as having come into force on 27 April 2020.
The Bill does not affect statutory demands served on individuals.
We strongly suspect that, regardless of when the statutory demand was served, applications for winding up petitions will be refused where they are being used solely as a means of securing the payment of rent during the coronavirus emergency.
5. What about Commercial Rent Arrears Recovery?
Landlords' options to bring enforcement action for rent arrears are currently restricted. Other than the forfeiture ban mentioned above, measures were introduced on 25 April 2020 to limit the use of Commercial Rent Arrears Recovery (CRAR).
CRAR is a procedure allowing landlords to appoint registered agents to attend a tenant's premises, take control of goods and sell those goods to meet arrears.
Formerly, it could be exercised as long as there were seven days' arrears of rent (principal rent, not service charges and other sums defined as rent under the lease). That threshold has been increased to 90 days' rent.
If the tenant pays enough to bring the arrears below that threshold before the landlord’s agents take control of the goods, the agents cannot take further action unless arrears increase again. That makes it relatively easy for tenants to render CRAR toothless, at least until arrears are significantly in excess of 90 days' rent.
The restrictions only affect new CRAR actions. Where a CRAR notice of enforcement was served up to and including 24 April 2020, the old threshold (7 days' principal rent) will continue to apply.
6. Am I entitled to a mortgage holiday?
As it stands, the government proposals for three-month mortgage holidays do not appear to extend to mortgages of commercial properties. The government's cash injection measures are, however, specifically targeted to allow banks to extend credit to businesses where necessary. In that context, most banks are likely to look more favourably on requests to defer payment. Borrowers should keep their lenders apprised of potential cashflow issues on the horizon so that arrangements can be put in place at an early stage.
7. What support is available to businesses?
The government's response is rapidly evolving. Up-to-date details can be accessed here.
8. How will the virus affect lease renewals?
Under the Landlord and Tenant Act 1954, the valuation date for determining the rent payable under a new lease is, broadly speaking, the date of the hearing.
Interim rent is payable (usually at the same level as that payable under the new lease) from the earliest date that could have been specified in the landlord's section 25 notice or the tenant's section 26 request.
In a rapidly falling market, landlords who have not yet served a section 25 notice should probably hold off to extend the period during which the rent is payable under the existing lease.
If a section 25 notice or section 26 request has already been served, landlords may wish to act quickly: agreeing or otherwise obtaining a determination of the rent before levels fall further.
9. What should I do if my tenant has gone into administration?
Insolvency law is complex and specialist advice should always be taken but the following general points can be made.
When a tenant company enters into administration, a statutory moratorium protects the company from legal action. A landlord may find that its remedies against the tenant (e.g. forfeiture, commercial rent arrears recovery, and legal proceedings) are restricted.
If the tenant continues to make use of the premises during the administration, the administrators may be under an obligation to continue to pay rent as an expense of the administration. Rent is payable at a daily rate for the period of beneficial occupation.
Landlords should liaise with the administrators to discuss the payment of rent and their intention for the business, including whether it is likely that a buyer will be found. Administrators may offer a surrender of the lease, and landlords should be careful not to expressly or impliedly (e.g. by accepting the keys) accept a surrender unless they are certain they want the lease to end.
The last word
Landlords should bear in mind that tenant businesses which are fundamentally strong will be put under unusual strain. If too many tenant businesses are allowed to fail during the course of the virus, this risks reducing demand for commercial space after the virus passes. That has the potential to have as significant an impact on landlords' portfolios in the medium term as the virus itself does in the short term.
This briefing was originally posted on 23 March 2020 and updated on 4 June 2020.