Thanks to the growing pandemic that is COVID-19, financial uncertainty is clearly commonplace. As such, most businesses will be paying immediate attention to their biggest and most time-critical financial commitments. And here it is, 25 March (the traditional March quarter day), meaning many commercial tenants should be paying their rent on Wednesday of next week. Likewise, most commercial and institutional landlords will be expecting rent to be paid on or shortly after that date.
“Do I need to carry on paying rent?”
The legal answer is “yes”, subject to any agreement which may be reached with the landlord to the contrary – that is because most modern commercial leases will require rent to be paid, on time and “without deduction or set off”. In most cases, the rent does not even have to be demanded to be due for payment. Simply failing to pay rent could prove to be fatal for a tenant given the various enforcement options open to landlords.
“Should I give my tenant a breathing space?”
There is no legal answer to that – it is a commercial decision for a landlord - maybe a PR decision too or even a moral decision. But if you are going to give your tenant a breather, you need to document what is agreed and think about the terms carefully.
So – what are the possible outcomes of non-payment of rent?
Quite a draconian landlord’s remedy, a landlord can forfeit a lease for non-payment of rent without giving any notice. The big risk is forfeiture by peaceable re-entry. This involves the landlord changing the locks (usually during the night) when no one is in the premises. As long as the landlord has waited until the grace period has expired (usually 21 days after the payment date) and not waived its right to forfeit (for example, by issuing rent demands), then this is a legitimate course of action for a landlord to take and has the immediate effect of bringing the lease to an end.
The tenant’s only way to get the lease back is to apply to Court for relief from forfeiture, or to claim that the forfeiture was unlawful. In order to obtain relief, the tenant would have to pay all the arrears of rent plus interest, as well as landlord’s legal costs (and its own legal costs) associated with the Court application.
In the meantime, pending the outcome of any Court application (or other agreement with the landlord), the tenant has no premises (or income from those premises), causing inconvenience and inevitable reputational damage. All of the tenant’s stock, equipment etc. would also be locked in the premises and the forfeiture of the lease would not relieve the tenant of its obligations to pay its employees and other creditors. Discussions with the landlord about a return to the premises can be time-consuming and are likely to be on the landlord’s terms.
On the other hand, unless the landlord has been desperate to get the premises back for some other reason, why would it choose to evict a good tenant on the basis of a short term crisis which is so far-reaching? Rents will only be going in one direction, and the premises could lie empty for months following an eviction, giving the landlord the headache of security, marketing and, eventually, rates liability (subject to the newly announced rates holiday). Finding a new tenant may be extremely problematic in the short to medium term.
There are other remedies for non-payment of rent of course as follows:
Commercial Rent Arrears Recovery (CRAR)
CRAR allows landlords to recover rent arrears by taking control of (and ultimately selling) a tenant’s goods kept at the premises – but unlike the old distress for rent remedy, notice has to be served first so the tenant will have some warning.
Depending on the lease set up, there could be a rent deposit or guarantor for a landlord to call on, or an AGA from a former tenant. Also available might be a rent diversion notice, served on a sub-tenant, which would mean that the tenant is deprived of sub-tenant income.
The landlord could also issue Court proceedings for a money claim for the arrears of rent. There is always the service of a statutory demand too, which really would focus a tenant’s mind on its priorities.
It is also worth noting that most commercial leases will provide for the landlord’s costs associated with the recovery of rent to be met by the tenant, sometimes on an indemnity basis.
Tenants’ bargaining power was already on the rise following the recent Court decisions regarding CVAs. It is likely to be a tenants’ market when the current restrictions ease so, in the meantime, a bold tenant might consider it is he that is in the driving seat, despite the current predicament, especially if he has a big portfolio. Tenants of decent covenant strength were relatively hard to find even before the pandemic.
Approaching the landlord to ask for a rent suspension or reduction puts the problem into the landlord’s hands. The situation is so unprecedented, that for a tenant with a historically strong covenant, there may be much more sense in a landlord being a little gracious if asked nicely by the tenant for a breathing space.
In the hope that financial recovery won’t be too far down the line, helping the tenant to stay solvent and remain in occupation might well be the best outcome for both parties.
Even if the tenant is unable to weather the storm, choosing to miss a rent payment without any dialogue is usually not recommended. The tenant has no control over what enforcement action will be taken, and if the landlord does nothing, the rental liability will just keep on increasing. A negotiated surrender might be possible, with dilapidations liability wrapped up at the same.
Any negotiated agreement between the parties should be recorded in writing, with the terms of any concession being clear. In particular, landlords should think carefully about how long any concession may last and if there is a mechanism for it to be brought to an end if market conditions improve. Consideration should be given to what else will be covered in a concession – will it deal with principal rent only, or service charge and other payments, too? Are payment instalment periods going to change? Will the agreement be personal to this tenant or can it be assigned? Is the deal to be confidential? What remedies are retained if the reduced rent is not paid? Will interest be charged?
Clearly landlords do not have to agree to any compromise, and many will have their own cash-flow and asset value to preserve (as well as, importantly, payments and other obligations to their own lenders, who may need to consent to any rent concessions the landlord may give). Each landlord/tenant relationship will bring with it subtle and important commercial differences but the legal implications of breaching tenant covenants and varying agreements ought not be overlooked in the face of the current economic and political climate.
Our Property Litigation team is on hand to help. Please contact:
Helena Davies: Helena.firstname.lastname@example.org / 07557 238915
Andrew Rogers: Andrew.email@example.com / 07505 846454