This article was originally published in New Law Journal and can be accessed here.
Critical to the concept of a lease of commercial property as an investment product is the contractual obligation on the tenant to pay the landlord a rent on a quarterly basis. Failure to make such payments on time entitles a landlord to terminate the lease, by forfeiture, to make the tenant insolvent or to execute distraint on goods owned by the tenant at the let premises up to the value of the unpaid rent. In the majority of cases, just the threat of taking such action is sufficient to recover rent arrears.
In an effort to mitigate the consequences of the Covid-19 pandemic, the Government has intervened quickly and materially to impose regulation on the, previously largely unregulated economic relationship between landlords and their tenants by:
- preventing a landlord from exercising a right of re-entry or forfeiture for non-payment of rent (82(1) Coronavirus Act 1982);
- preventing the service or presentation of a statutory demand (The Corporate Insolvency and Governance Act 2020); and
- restricting the right to distrain in conjunction with the other two restrictions. (The Taking Control of Goods and Certification of Enforcement Agency (Amendment) (Coronavirus) Regulations 2020).
Originally, these limitations were time limited until 30th September, however the forfeiture restrictions have been extended to the end of the year and it is expected that the other two restrictions will likewise be extended.
In the short to medium term, the introduction and the subsequent extension of the moratoria until the end of the year is having an effect on landlords who are growing increasingly restive. From their perspective, the moratoria have given to tenants, in all but name, a charter not to pay rent.
The principle issue is that the moratoria makes no distinction between those tenants who are capable of paying rent and those whose businesses have been so ravaged by the rapid decline in footfall caused by the lockdown and who simply cannot pay their rent. The economic reality being that the former class of tenants have been able to re-open to a degree and operate, if not at a profit, in an economically viable fashion whereas the latter group are simply unable to operate at all.
The Government also published a non-binding code of conduct as to how landlords and tenants should be expected to try and deal with the situation in which they have been placed. The code is merely a statement of the obvious point that tenants remain under a contractual duty to pay rent (if they can) and that both parties should seek to negotiate temporary measures to achieve some payment of rent during the period of the moratoria.
In practice, advisers have had to advise their landlord clients that they have two choices if tenants are not paying rent, either:
- To wait until the moratoria is lifted and, then, immediately enforce by threat of forfeiture and/or insolvency proceedings, for the recovery of the unpaid rent; or
- To offer temporary concessions to tenants by agreeing to grant rent free periods or reducing rents for an agreed time.
Neither of these choices will be attractive to a landlord. The first because the period of the moratoria can easily be extended by statutory instrument. Given the worsening climate, both in terms of the onset of a second wave and of winter, the further extension of the moratoria to the end of March 2021 is foreseeable. At that point, an unpaid landlord will have nearly a year’s worth of arrears of rent accrued.
By default, therefore, many landlords (particularly smaller private investors) are increasingly agreeing to forgive rent arrears and/or reducing rents in return for their tenants agreeing to resume paying some rents.
The danger in taking this approach is that leases are relatively long-term commitments. Therefore, care needs to be taken to avoid what may be a short-term fix adversely affecting the balance of power in leases which, traditionally, favours a landlord. Therefore in negotiating and documenting such concessions care needs to be taken to ensure that:
- Any concession should be personal to the current tenant;
- The obligations of the tenant to pay rent on the rent payment dates and any service charge remains as the lease provides for but payable, for the period of the concession, at the agreed lower rate;
- The concession operates as a waiver of the obligation to pay rent at the contractual rate, but crucially, not an express waiver for the purposes of s.82(2) of the Coronavirus Act 2020;
- The concession be disregarded on any rent review under the lease;
- That the concession does not affect the open market rental value of the Property and, particularly, that the landlord may use the full rent due under the lease (that is the rent without the benefit of the concession) as a comparable;
- The existence and terms of the letter are acknowledged as not constituting fair or reasonable grounds to change the terms of the Lease on any renewal under the Landlord and Tenant Act 1954; and
- The concession remains confidential between the landlord and the tenant.
Arguably those most badly affected by the consequences of the moratoria are not institutional landlords but smaller private landlords, typically family trusts and charities. These types of investors may have made significant capital investment in order to acquire the freehold of a commercial property let to, for instance, a national retailer; thus, getting a regular income and potential capital growth. These investors have been, at a stroke, deprived of income which they probably badly need to distribute to their beneficiaries or to fund charitable activities. The inequality of arms between the resources of national retailers and private individuals has been starkly demonstrated by the demands made by such tenants of their landlords in negotiations to agree terms on which rental payments will be resumed, albeit at a lower level than the contractual rate.
For these unfortunate landlords, this winter will be long and unforgiving with the ever-growing threat of tenant default turning into tenant insolvency.