COVID-19: Considerations for tenants

Many tenants have already approached their landlords to ask for assistance in mitigating their financial situations.  They have requested rent holidays, rent reductions, and monthly as opposed to quarterly rent payment schedules.  Some tenants are also seeking longer term variations of their leases and are proposing timetables for repayment of arrears. Tenants have also threatened to decline and have declined to pay rent or certain items of a service charge. Tenants wishing to reduce liabilities will be considering whether they can exit their leases altogether.

If they cannot reduce their liabilities, both under their leases and in a wider business context, some tenants will become close to insolvency. The Corporate Insolvency and Governance Act ("CIGA" provides some protection for tenants adversely affected by Covid-19. It is retrospective in effect and prevents landlords from using insolvency proceedings as a threat to force payment of rents.

We have seen several different types of request from tenants in respect of payments under leases. We provide comments on these below. We hope this may help you to decide what, if anything, to do in order to mitigate rent and other payments payable under your leases. Please be aware that every situation is different and you must also consider the full terms of your lease and any other information you have before deciding what to do. We are happy to discuss this with you and to assist you in reviewing specific leases.

This note focuses primarily on the considerations that are likely to arise in landlord and tenant negotiations, during the COVID-19 crisis.  Tenants will also be concerned about any exposure they have to previous landlords under authorised guarantee agreements, other forms of guarantee and, less commonly, under "old leases". If you have any concerns around residual and contingent liabilities in respect of leasehold interests you have assigned, we would be happy to discuss this further with you.

The position is likely to change as a result of further legislative changes to deal with issues that affect landlords and tenants arising from Covid-19. We will update this note regularly to reflect further changes.

May we pay less rent?

We have seen requests from tenants to pay less rent for a fixed, for the period during which the Covid-19 virus affects trade and for the remainder of a lease. Sometimes these requests are coupled with a proposal to pay the arrears caused by the reduced rent at a later date, which will increase the likelihood of such a request being accepted promptly.   

Leases, except where rent is entirely calculated by turnover, do not contain provisions allowing reductions in rent. Increased flexibility in rent terms may be a change for the future. In one recent Landlord and Tenant 1954 Act lease renewal claim, the court imposed an upward or downward rent review into a renewal lease. However, at present, rent can only be reduced or delayed by agreement between a landlord and a tenant.

If your landlord is prepared to negotiate a change to your rent payment obligations under the terms of your lease, this arrangement should be documented.  If it is not, there is a risk of future dispute. For example, if a clear record is not made of the period of rent suspension or reduction, this may very well be disputed once landlords see the Government lifting restrictions and once they think economic conditions are improving.  

A change in rent payment terms can best be recorded in a side letter. This is preferable to a deed of variation of a lease, as a variation is more time consuming to negotiate.  The side letter should contain:

• the new rental payment terms including the terms, if any, of repayment of the accrued arrears;
• the length of time for which these new arrangements will last and the situations when the landlord can revoke the concession;
• a statement that the other lease terms remain unaffected by the concession and that the letter will be disregarded on rent review;
• agreement as to what happens when either party assigns their interest;
• confidentiality provisions; and
• the agreement of any guarantor (including guarantors under AGAs) to its terms.

May we suspend rent payments for a period?

Some landlords, such as Network Rail, have agreed to waive their tenants' March quarter rents. Others such as the City of London Corporation have agreed to suspend rent payments. If your landlord is willing to waive or suspend payment of rent for a limited period, the terms of this agreement should be recorded. The landlord's ability to take action for reduced or non-payment of rents should be suspended during this period. Recent legislation protects commercial tenants from forfeiture for non-payment of rent before the end of June. The Government has extended the number of days' rent that must be owing before a landlord may use commercial rent arrears recovery from 7 to at least 457 days. CIGA has retrospective effect back to 27 April 2020, and prevents landlords using statutory demands and winding up petitions as tools to get tenants to pay rent before the end of March 2021. Despite this, recording the terms of any concession in writing should lessen the risk of dispute later.

Can we settle how much rent we pay without asking the landlord?

You are not entitled to reduce the rent you pay under your lease without your landlord's agreement. Following the 25 March quarter day some tenants have ceased paying rent and others paid a single month's rent rather than a full quarter's. If a landlord accepts one month's rent it will not lose the right to recover the additional two month's rent as a debt if they remain unpaid.  Because of this, agreeing to pay a third of the quarterly rent rather than simply paying a month's rent will give you greater certainty that your landlord will not take action immediately.

The risk in unilaterally paying a single month's rent is that, subject to the terms of your lease, a landlord can still take action for the unpaid rent.

The Government has suspended landlords' ability to forfeit for arrears of rent. Orders made in claims for possession as a result of forfeiture for arrears that have already begun or orders that have already been made will not be made or enforced until after 30 June 2021 at the earliest.

The Government has now curtailed landlords' use of Commercial Rent Arrears Recovery ("CRAR"), statutory demands and winding up petitions to force tenants to pay rent.

CRAR: CRAR enables a landlord to take a tenant's goods from a premises as security for unpaid rent. Previously, if 7 days' worth of rent (calculated on a daily basis), was in arrears, a landlord was entitled to serve notice on a tenant and subsequently attempt to enter premises either itself or through an enforcement agent to take control of goods. The availability of this as a remedy was reduced while buildings were closed during the lockdown because, in most instances, enforcement agents are not entitled to force entry into buildings for CRAR. With the re-opening of buildings, CRAR might have become a more commonly used method of securing rent, had it not been curtailed by Government.

The Taking Control of Goods (Amendment)(Coronavirus) Regulations 2020 increased the amount of rent that must be owing before a landlord can start CRAR. For a notice of enforcement to be given to a tenant or for a landlord to take control of goods up to June 2021, there must be at least 457 days' worth of rent owing and between 24 June and 30 June 2021, at least 554 days. From 24 December onwards this amount increases to 366 days. This means that currently very few, if any, landlords are seeking to exercise CRAR.

Statutory demands and winding up petitions: The legislation being introduced in CIGA provides various protections for companies that are at risk of insolvency – see our note here. It also prevents landlords from using statutory demands and winding up petitions against companies, including tenants, except if they have reasonable grounds for believing that:

(i) Covid-19 has not had an adverse financial effect on the tenant; or

(ii) the facts behind the ground on which the landlord is seeking to wind up a tenant would have arisen even if Covid-19 had not had an adverse financial effect on the tenant. Statutory demands served after 30 March 2020 are no longer a proper basis for a winding up petition.

To issue a winding up petition, a landlord must include a statement in the petition that it believes one of the above two exceptions applies. It will be difficult for a landlord to be confident of this and risky for a landlord to make such a declaration that it knows to be untrue.

As the legislation is retrospective back to 27 April 2020, if a winding up petition was issued against a tenant between 27 April and the date of implementation of CIGA which does not meet either of the exceptions, the court may restore the tenant to the position it was in before the petition was presented to court. Similarly, if a winding up order has been made after 27 April and before CIGA was enacted, which does not meet either of the exceptions, the court will be regarded as not having the power to make the winding up order. A restriction has also been placed on the advertisement of winding up petitions.      

We are not going to pay elements of the service charge that are Covid-19 related

Where a landlord of multi-let premises has incurred costs in connection with its response to Covid-19 which are outside its usual service charge expenditure, some tenants are trying to argue that such costs are for the landlord to pay, or should be recovered under its insurance policies, rather than being passed on to tenants via the service charge.  Whether or not this is a good argument will depend on the drafting of the service charge provisions in a lease. Most leases will allow recovery of costs incurred by a landlord in relation to compliance with statute, regulations, health and safety measures, safety and security and the well-being of tenants.

Tenants should, where possible, exercise their rights to review service charge budgets and accounts to satisfy themselves that the costs of services incurred are reasonable in the current circumstances.  Whilst landlords will have many on-going service charge costs that cannot be easily suspended, tenants should enquire whether, for example, staff providing services could be furloughed under the Coronavirus Job Retention Scheme or if other services could be temporarily withdrawn.

Can we change the terms of the lease permanently because we expect difficult trading conditions?

A tenant is not entitled to seek permanent variation of a lease without the landlord's agreement.  If a tenant tried to argue that because of the change in conditions it should be entitled to change the lease terms, a court would be likely to say that the changing conditions were a risk a tenant accepts when it takes a lease.  Some forward-thinking landlords may be willing to vary leases for the term but we have yet to see any landlord agree to this.  

Can we terminate our lease?

If you would like to terminate your lease and a landlord would like to recover premises, now is likely to be an opportunity to do so. This is more likely to be attractive for a landlord if it already has plans for development or works to the building. We cover this in section 3 below.

For tenants who have served break notices and are expecting their leases to terminate as a result during the lockdown period, it is very important to check the terms of the break in their lease. These may require putting the premises back into a particular condition such as by removing alterations and they will almost certainly require the delivery up of premises with vacant possession. Each lease is different and tenants must consider what their break clause requires. As a general point, it is still possible to employ contractors to remove possessions from properties and the courts are unlikely to accept that Covid-19 provides grounds for a tenant to ignore the conditions of a break. Please contact us if you need advice on a lease break or break notice.

A commercial tenant is unlikely to be able to argue successfully in court that its lease permits it unilaterally to withhold the rent. It may be able to counterclaim for an amount equivalent to the rent paid under a lease if it is unable to use the premises.

Most modern commercial leases only allow for a rent cesser on the occurrence of an insured risk. These are usually fairly narrowly drawn. They usually cover damage to buildings and property rather than the adverse financial effect of an epidemic.  Commercial leases often also contain provisions which explicitly prevent tenants from withholding or off-setting rent or other payments.

If a landlord will not agree suspension of rent then you could argue that:

Breach of Quiet Enjoyment and Derogation from Grant

The landlord has breached your quiet enjoyment of the premises or derogated from grant (for instance if the landlord has shut the premises or closed common parts for deep cleaning) and that you are therefore entitled to compensation equivalent to all the rent and any other charges.  You may also be able to claim for other losses arising. Such an argument can be based on the fact that the landlord's acts have made the premises unfit or unsuitable for the purpose for which you took them. If the premises are closed without your agreement, you would have a reasonable chance of succeeding with this argument in court.

Forfeiture

Section 82 of the CA prevents landlords from forfeiting a commercial lease falling within Part 2 of the Landlord and Tenant Act 1954 ("Pt2 LTA 1954") for non-payment of rent until 30 June 2021. The Ministry for Housing, Communities and Local Government ("MHCLG") has explained that this is intended to cover all commercial leases, so not just those falling within Pt2 LTA 1954. It has also explained that rent means any payment due from a landlord to a tenant under a lease. This would include service charges. If your landlord has closed the premises without your agreement and has prevented you having access, you could assert that the landlord has illegally forfeited the lease. If you want to terminate your lease, you could choose to accept this by telling the landlord that although forfeiture is illegal you will accept this and you will not be seeking relief from forfeiture. In this case it would be difficult for a landlord to maintain it had not forfeited the lease even if that was not its intention.

Force Majeure

Covid-19 is a force majeure that relieves a tenant of having to pay rent. This argument is unlikely to succeed except if your lease contains specific reference to force majeure which covers the present situation. Most leases do not.

Frustration 

The lease has been frustrated because you have not been able to use the premises. This is unlikely to be a successful argument in court except if the remainder of the term is short and expires before you are able to return to the premises.  The Government's requirement for businesses to close premises may strengthen this argument.  In most cases a temporary inability to use premises will not amount to frustration of a lease.

You should consider whether you have insurance that may provide any cover in relation to trading losses or lease costs. You should also consider your financial position and whether there are any risks in continuing to trade and pay rent.

Insurance

Landlord's insurance policies will almost certainly not protect a tenant against the closure of its premises. These polices may protect the landlord against the costs of this. If you have interruption of business insurance or another policy that gives some protection for loss of trade, this may help cover some of your losses and costs. We can provide further information on this if you require. 

Risks of continuing to trade

CIGA provides for the suspension of directors' liability for wrongful trading. Without this, directors have a duty not to trade once they conclude or should have concluded that their company cannot avoid an insolvent liquidation or administration. They must minimise loss to the company's creditors. This duty could be enforced directly against a director by means of disqualification from acting as a director for up to 15 years, by fines and by a requirement to repay losses resulting from continued trading when a director should have concluded the inevitability of an insolvent liquidation or administration. The Government's legislation will protect directors continuing to run companies that at present could not avoid insolvent liquidation or administration but it does not remove their duties to their shareholders. We can provide further advice on this if you require.

Financial defaults under loan agreements

You should check if a failure to pay rents may amount to an event of default under any loan agreements. If so, your lender should be informed before you fail to pay any rent.

A landlord not obliged to accept a request for rent reduction or suspension. It may not be able to enforce the obligation to pay rent if it has closed premises or made them impossible to use. It cannot forfeit before 30 June 2021 for arrears. It cannot use CRAR to obtain payment for less than 366 days rent at present and at least 457 days' rent from 31 March 2021. It also cannot effectively threaten to wind up a tenant for non-payment as long as the tenant can show its financial position has worsened as a consequence of or for reasons relating to Covid-19.

Rent Deposit

A landlord faced with unpaid rent may be able to avail itself of any rent deposit. It could attempt to require topping up of that deposit. If premises are closed or incapable of beneficial use, a court may say that the deposit has been used as a result of the landlord's breach of the lease and refuse to enforce the terms of a rent deposit deed. A landlord is likely to ask the tenant for an immediate top-up of the rent deposit and may seek interest for any delay in providing this.

Guarantee

A guarantee will be enforceable to the extent that the breach of covenant the tenant has committed is properly enforceable against the tenant. The guarantor usually has the same defences to a claim by a landlord as the tenant has. Subject to this and the validity of the guarantee, landlords can continue to recover under guarantees.

Court claims for payment of rent

If a landlord shuts premises without your agreement and then brings court proceedings to recover unpaid rent, you could counterclaim for losses resulting from the closure and a court would almost certainly award you damages amounting to the rent that they would have paid, other charges under the lease and losses arising from any loss of business. This would more than set off the amount owing for rent and other charges.

Forfeiture

The CA has prevented landlords from taking steps to forfeit and recover possession of premises as a result of a failure to pay rent.  MHCLG has recorded that rent in this context is any payment due from a tenant to a landlord under a commercial lease. This protects occupational tenants and probably intermediate commercial tenants although the MHCLG has not clarified this. The legislation would not be effective if a superior landlord could forfeit an intermediate lease which would have the effect of terminating an occupational sublease. This removes the risk of forfeiture for arrears until 30 June 2021. The Act does not exclude existing arrears from this protection and so it would seem that the arrears do not have to be arrears that accrue in the March and June 2020 quarters alone. 

At the moment, a landlord can still forfeit and recover possession of premises as a result of other breaches of leases, for example, failure to comply with keep open clauses, insolvency defaults or wants of repair.  The CA does not change the position in respect of existing enforcement action.

Whilst tenants that go into arrears on their rent will be protected from eviction in the short term, they will need to repay the arrears in full plus accrued interest once the protection is lifted to avoid facing forfeiture proceedings at that point.  For this reason, we continue to recommend that landlords and tenants enter into discussions regarding rent suspensions and repayment terms, and document what is agreed to avoid later disputes.

Keep open clauses

Leases which contain rents calculated on the basis of turnover, particularly in the retail sector, often oblige tenants to stay open for business during normal opening hours. Where footfall and has dropped significantly for tenants, tenants will be considering closing premises. 

Courts can require tenants to keep premises open.  This usually only happens where a tenant is an anchor store or has some other special significance to a landlord. A court has discretion whether to award specific performance or damages for loss of profit as a remedy for a tenant's failure to keep premises open. In the present circumstances with little footfall and poor trade, the balance of convenience between the landlord and the tenant is likely to persuade a court to refuse a claim by a landlord for specific performance. Instead the court is more likely to award damages for loss. The landlord's losses where there is little footfall are likely to be small. This is particularly the case if the nature of the premises means that the tenant is required to keep the premises closed, including many of those in the leisure and hospitality sectors.

Recovering rent directly from sub-tenants

When a tenant is in arrears of rent, a landlord is permitted by section 81 of the Tribunals, Courts and Enforcement Act 2007, to serve a notice on any sub-tenant of the premises requiring it to pay rent directly to the landlord until the arrears have been cleared. While landlords may attempt to get rent arrears paid in this way, we expect that they will not be permitted to forfeit the intermediate lease if the sub-tenant does not pay. In addition section 81 is now only applicable if rent for a period of 366 days is owing under the lease. This will increase to 457 days from 31 March 2021 and to 554 days from 24 June to 30 June 2021. Landlords that have served notices seeking direct payment of arrears from sub-tenants owing for less than 366 days will not be able to require them to make payment. These sub-tenants should still pay rent to their intermediate landlord under their sub-lease.  

If you want to try to reduce rents payable under your leases, you should approach your landlord to propose this. Most landlords do not want vacant premises and are unlikely to take action against you before 1 July 2021 if you do not pay rent. The protection given to tenants in respect of forfeiture and also the restriction on winding up a tenant should assist with these negotiations, as should the new code of practice that has been developed with leaders from the retail, hospitality and property sectors to provide clarity for businesses when discussing rental arrangements.  As described above, this is not a perfect solution and should not be relied upon in place of formal arrangements with landlords, which you should seek to put in place before 1 July 2021 to avoid forfeiture action.

Many landlords have already considered and agreed rent reductions and rent holidays with tenants. Landlords like to believe that they will eventually recover unpaid rents. It is too early to know if this is correct. The measures announced by the Government to date have focused on the financial position of tenants.  There are no current proposals for a scheme to reimburse landlords for lost rents (although there is ongoing consultation in this respect). This will affect the ability of some landlords to agree concessions with their tenants. 

The Government has announced that it will be reviewing various aspects of landlord and tenant legislation during 2021, although it is not clear which yet. We will monitor the situation.