Non-forfeiture of commercial leases under the Coronavirus Act 2020 – some questions answered

Correct as at 31st March 2020

The Coronavirus Act 2020 (“the Act”) was passed on 25 March 2020 and is now law. Amongst other sweeping measures brought in by the Act, the provisions of Section 82 – which prevents landlords from enforcing a right to forfeit a commercial lease for non-payment of rent – is generating lots of questions from landlords, tenants and other stakeholders.

Daniel Woodcock, a Partner in Butcher & Barlow’s Commercial Property Department, considers the protection against forfeiture provisions for commercial tenants created by the Act, and provides answers to some common questions which may be raised by landlords, tenants, guarantors, lenders and others in the property industry in respect of this new legislation.

 “I read your previous article which predicted that the Government was about to introduce protection from forfeiture for commercial tenants – are these provisions now law?”

Yes – these are now enshrined in Section 82 of the new Act. The key provisions of this section are:

• a landlord cannot enforce a right of re-entry or forfeiture for non-payment of rent in respect of a relevant business tenancy during the relevant period.
• A ‘relevant business’ means any to which Part 2 of the Landlord and Tenant Act 1954 (“LTA 1954”) applies – or would do, if any relevant occupier were the tenant.
• The ‘relevant period’ means that commencing on 26 March 2020 and expiring on 30 June 2020, or such later date as the Government decides to keep such protection for tenants in place beyond 30 June 2020.

For a link to my previous article, please here.

“I am a commercial tenant of restaurant premises whose business is suffering cash-flow problems as a result of the Government’s lock-down measures. Does this change in the law mean that I do not have to pay rent, or other sums due under my lease, for the next 3 months?”

No – the effect of the Act is only that your landlord cannot effect peaceable re-entry and change the locks, or enforce an order to forfeit your lease as a result of the non-payment of rent during the relevant period. Your normal lease obligations remain legally binding and you should continue to make payments of rent and other sums due under your lease as and when these fall due.

If you fail to make payment, you will have to pay interest on such unpaid sums and your landlord could enforce its remedies, including forfeiture of your lease, at the end of the relevant period when this protection falls away.

Under the Act, rent means sums reserved as rent under the relevant business tenancy. Typically, such leases include service charges, insurance rent, VAT and interest as ‘rent’ in addition to the main annual rent. The protection extends to such sums if so defined in the lease, but again, you are only protected from forfeiture being enforced – you should still pay these sums as they fall due.

“I am a commercial landlord of a portfolio of retail premises, some of which have been forced to close due to the Coronavirus outbreak. One of my tenants appears to have unlawfully sub-let its premises in breach of the terms of its lease. Can I still seek to forfeit the tenant’s lease as a result of this breach?”

Yes – Section 82 only prevents landlords enforcing a right to forfeit a commercial tenant’s lease for non-payment of rent. As a consequence, landlords can still exercise a right of forfeiture where this is authorised by a court order on other grounds and proceed to enforce such an order in the usual way.

“I am a tenant of a small, independent coffee shop and I have decided that I would like to assign my lease and retire. It is a condition of any assignment under my lease that all rent must be paid up to date – does this change in the law mean that I do not have to comply with that condition now?”

No – you must still comply.  Tenants such as yourself must ensure that if they wish to exercise any right under their lease whose valid operation is conditional on the payment of rent, or the observance or performance of any other obligations, that those conditions are still strictly adhered to. This is also the case, for example, where tenants may be looking to underlet premises, exercise an option to renew their lease, or exercise a right to break their lease.

“I am a landlord of retail premises let on a 5-year lease. The tenant is unable to pay their rent and claims that this is due to reduced cash-flow caused by the current lock-down. My business partner has told me that these protections do not apply to this lease as it was contracted-out of the security of tenure provisions of the LTA 1954 – is she correct?”

No – The protection afforded by Section 82(1) of the Act therefore applies to tenants of both  protected and contracted-out tenancies. The Act states that a relevant business tenancy means any to which Part 2 of the LTA 1954 applies – or would do, if any relevant occupier were the tenant. Part 2 of the LTA 1954 governs both protected business tenancies and contracted-out tenancies.

“I am a pub tenant. My landlord is trying to help me whilst the pub has been forced to shut and has offered a rent payment holiday. However, before I accept, I have heard that this concession may not be binding on my landlord and he may try to forfeit my lease if I do not pay my rent during this period, even if I sign up to this arrangement?”

The Act does provide a protection for landlords, insofar as no conduct by them, during the relevant period, short of an arrangement expressly made in writing, will be held to operate as a waiver of their right to forfeit a lease for non-payment of rent. However, provided that your arrangement does takes the form of an express written agreement then your landlord would not be able to rely upon Section 82(2). For further guidance on how tenants can safely sign up to such lease re-gearing arrangements in a legally valid way, please see the link below to a previous article which I have written entitled “Changing Gears – How Landlords and Tenants can work together to mutual advantage during the Coronavirus crisis”:

“I am agent acting for a landlord who is minded to agree to grant a wedding venue tenant a rent free period to help them with their cash-flow during the current trading restrictions. In return, the tenant has agreed that a forthcoming right for them to break the lease can be set-aside. How do I go about documenting this arrangement so that it is legally valid and operates as intended?”

My previous article, “Changing Gears – How Landlords and Tenants can work together to mutual advantage during the Coronavirus crisis”, also provides guidance on the pros and cons for landlords of such lease re-gearing transactions and how these can be safely and effectively documented by a solicitor who is experienced in this area.

“Two years ago I agree to stand as a guarantor of a lease of a children’s day nursery. The nursery has closed due the current lock-down restrictions and the tenant is no longer receiving income from customers and may be unable to make its rent payments as and when these fall due. Does this change in the law protect me from any claim for non-payment of rent the landlord may bring against me as guarantor?”

No – unfortunately not. The protection afforded by the Act only applies to relevant business tenants, not their guarantors, and, as previously mentioned, does not serve to excuse the non-payment of rents, merely to prevent landlords from enforcing a right to forfeit a lease in those circumstances. If  the landlord seeks to claim against you for unpaid rents, or for any other reason, you should seek advice from a solicitor.

“I work at a bank which has lent money to a landlord which has a large portfolio of properties – several of which comprise bars and restaurants which have been forced to temporarily close due to the Coronavirus outbreak. We are concerned at reports that the borrower may be in the process of negotiating a number of informal temporary rental holidays with certain tenants, but we have not been consulted over these arrangements.”

As stated above, the Act provides some protection to landlords where their conduct during the relevant period may otherwise have amounted to a waiver from forfeiture for non-payment of rent. However, this protection only applies to landlords – and any express waiver will fall outside of the protection of Section 82(2). Well drafted facility agreements and security documentation should prevent a landlord borrower from agreeing such measures without their lender’s consent, but you are advised to review your security to check. Any lease re-gearing transaction which you are required to consent to should be documented in writing and the bank will no doubt wish for its own solicitor to review and approve the requisite documentation before it is completed.

“What if I have other questions?”

If you are a landlord, tenant, or a guarantor of a commercial lease, or a lender, and you would like further advice about:

• The operation of Section 82 of the Coronavirus Act 2020;
• Advice on lease re-gearing;
• Advice on any other commercial landlord or tenant matter; or
• Advice on any other aspect of commercial property law,

then please do not hesitate to contact Daniel for further advice on 07741 894705 or by email at dwoodcock@butcher-barlow.co.uk. We have provided a number of example scenarios above but each lease and situation is different and therefore specific advice on your lease and the options available should be taken. Following Government guidelines, our offices are closed but we remain fully operational via remote working and can make use of video conferencing and telephone conferences in order to provide the high quality legal service you have come to expect from Butcher & Barlow.

 

To view Butcher & Barlow’s own working practices, please visit www.butcher-barlow.co.uk/news.