Frequently asked questions
This note deals with some of the questions we are commonly asked by tenant clients in light of the Covid-19 pandemic. A separate note for landlords 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 it is intended that this note will be updated and extended as information comes to light and further issues emerge but you should take specific legal advice for the latest position. The note applies to the law in England only.
1. Can I arrange more time to pay the rent?
The starting point is that the rent remains payable as per the terms of the lease. Tenants should check their lease for a rent suspension clause, which might suspend the rent in certain circumstances, but usually only where the property has become uninhabitable as a result of an insured risk. There is often also a requirement for the property to have become damaged or destroyed, meaning that the coronavirus itself is unlikely to trigger a rent suspension.
Tenants can consider asking their landlord for a rent reduction or deferment. If your landlord is willing in principle to come to an arrangement, it is important that the parties are clear on what has been agreed. Key points to bear in mind are:
- How long will the arrangement last? Will there be any option to renew the arrangement?
- Is the obligation to pay rent to be suspended entirely/reduced permanently or simply deferred to a later date or reduced for a set period? If deferred, will interest be payable?
- Can the landlord withdraw the arrangement, and in what circumstances?
- Will the arrangement be personal to the parties or can an assignee of the lease take the benefit?
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. 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.
2. Can I terminate my lease?
As it stands, the government has not announced any measures allowing for leases to be terminated early by either party as a result of coronavirus. Broadly speaking, you can probably only terminate your lease if the term has expired or is about to; by negotiating an agreed surrender with the landlord; or by exercising a break clause in the lease.
If you do intend to exercise a break clause, check whether there are any conditions you need to comply with before exercising the break. A common condition is that all rents must be paid up to date. If a rent suspension has been agreed, this condition would need to be waived by the landlord before the break could be exercised. Tenants may want to include wording to this effect on any side letter agreeing a rent suspension.
A separate note on our website deals with the possibility of a lease ending by a doctrine known as frustration.
3. Can the landlord terminate the lease?
Currently, 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 September 2020. That period may be further 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 September 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.
It may be that not all tenancies of commercial premises fall within the ban so specific advice should be taken if you plan to withhold rent or other payments.
There is currently no prohibition on forfeiting for other breaches. Landlords must serve a forfeiture notice under section 146 of the Law of Property Act 1925 before seeking to forfeit for any breach other than rent arrears. If a landlord tries to enforce a right to forfeit via court proceedings, it could be delayed: currently, new possession claims (other than against squatters and trespassers) are stayed until 23 August 2020.
4. What other steps can my landlord take to recover rent arrears?
In addition to the restrictions on forfeiture noted above, most of the other options for landlords to recover rent arrears are currently restricted.
Landlords could serve a statutory demand seeking payment of rent arrears. If a statutory demand is unpaid after 21 days, a creditor can usually petition the court to wind up the debtor company. However, new legislation means that no winding-up petition can be presented after 27 April 2020 in respect of a statutory demand served on a company between 1 March 2020 and 30 September 2020. Regardless of when a statutory demand was served, no winding up petition and be presented until after 30 September 2020, unless the creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the debtor, or the debtor would not have been able to pay its debts even if coronavirus had not had a financial effect on it. This legislation does not affect statutory demands served on individuals.
Use of Commercial Rent Arrears Recovery ("CRAR") is also restricted. CRAR is a process where a landlord appoints an agent to serve notice on a tenant and then take control of a tenant's goods to sell them to pay off rent arrears. Formerly, it could be initiated where there were seven days' arrears of principal rent (i.e. annual rent, not service charge or other sums described as rent under the lease). For new CRAR actions, the threshold has been increased to 189 days' principal rent. You can read more about the changes here.
Landlords are still able to bring money claims through the courts. It remains to be seen how the courts will treat those claims, and, as importantly, how landlords will enforce a judgment (if they get one). Tenants do need to be mindful that arrears are still accruing even if landlords' enforcement options are currently restricted: as it stands, once the restrictions are lifted, landlords will still be able to recover arrears with interest.
5. What support is available to businesses?
The government's response is rapidly evolving. Up-to-date details can be accessed here.
One important measure for tenants is a business rates holiday for the next twelve months for some sectors.
6. 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 from the earliest date that could have been specified in the landlord's section 25 notice or the tenant's section 26 request. Interim rent is usually set at the same level as that payable under the new lease, though there are exceptions where market conditions change significantly in the time between the old lease and the new one.
In a rapidly falling market, tenants who have not yet served a section 26 request may wish to do so (if the option is currently available) in order to get the benefit of potentially lower rent sooner.
If a section 25 notice or section 26 request has already been served, tenants may want to hold off agreeing or obtaining a determination of the rent, in case rent levels fall.
7. What should I do if I don't think I can keep trading?
Dialogue with lenders and creditors at an early stage may help resolve issues while the business is still able to trade. Part of the government's measures to support the economy include cash injections to ensure banks can extend credit to distressed businesses. As a result, banks may be more willing to lend to businesses whose fundamentals are strong but are currently under strain.
If you are unable to meet your ongoing liabilities as they fall due despite the government measures, you might consider entering into an insolvency process. Insolvency law is beyond the scope of this article but entering into a CVA (company voluntary arrangement) or administration process may provide some protection from creditors until you are back on your feet.
Ultimately, landlords do not want empty properties. In a difficult market, landlords may be more willing to negotiate terms in order to avoid having their properties sit empty for long periods, costing them money. Constructive dialogue between landlords and tenants is the best opportunity for both to weather the storm.
First posted 26 March 2020 and updated 7 May 2020 & 6 July 2020.