Coronavirus Act and Commercial Rents: how this affects landlords and tenants
Whether you are a landlord or a tenant the impact of Covid 19 is being felt financially. With employees being urged to work from home where able and businesses closing to limit the impact of the virus, the question arises as to how, or whether, tenants can pay their rent and what landlord can do if rent goes unpaid.
The overwhelming majority of commercial leases provide the landlord with the right to forfeit a lease should the tenant not pay their rent. This is standard practice and makes commercial sense; if a tenant is in arrears then the landlord should have the ability to be able to end the lease and take back their property (as well as take other action against the tenant for the breach of their contract). The period of time before a landlord can take such action will be defined in the lease itself, but usually ranges from 14 to 28 days.
In standard commercial leases there are limited opportunities for the tenant to withhold payment of the rent, or set it off due to action, or inaction, by the landlord. Where there is a right granted to the tenant to put a pause on rent payments this normally relates to an insured, and occasionally uninsured, event occurring where the premises is no longer fit for purpose. The definition used in most leases refers to the building or premises being damaged or destroyed so that it is no longer fit to trade from or occupy. Given the nature of the epidemic it will be difficult to argue that it has caused any damage or destruction, unless say deep cleaning was required so the tenant cannot trade, but this is only likely to be temporary in any event and soon the rent will again fall due.
Both landlords and tenants should take this opportunity to review any lease they have in place to see what their respective positions are and what actions and remedies are available to them. Should you need any clarification on your position then please call us and we will be happy to assist.
Where there is no lease in place it will be matter of defining the relationship between the parties as to what type of legal agreement is in place. Even if nothing is in writing this does not stop a lease from being implied, based on what each of the parties have done historically, i.e. when the rent is paid, what period rent payments cover and if the tenant is the sole occupier of the premises. If there is no lease in place then we strongly recommend that you contact us in order that we can advise you as to what level of protection you currently have to remain in your premises; or conversely if you are a landlord what potential action you can take against your tenant.
The position above has now changed, with protection brought in to protect tenants where they are unable to pay their rent.
Under the Coronavirus Act 2020 (the “Act”) landlords will not be able to take action to repossess properties for non-payment of rent until the 30th June 2020 (“the relevant period”). The government has reserved the right to extend this deadline should they deem it necessary if the epidemic is still ongoing.
There is no specific obligation within the Act for tenants to repay the rent, however it is worth noting that the wording of the Act is clear – it is a stay on eviction proceedings, not a rent free period for tenants. The Act goes further to state that during the relevant period any action, or lack thereof, by landlords, except a waiver in writing, diminishes their rights of repossession when the relevant period expires.
Given this there is an onus on both landlords and tenants to liaise directly regarding any proposals and tenants should notify their landlord if they intend to withhold rent and come up with a repayment scheme. It may be that a tenant can afford to pay a certain percentage of their rent, which will ease their cashflow down the line when unpaid rent becomes due, and will also allow the landlord to have a measure of income in these difficult times.
Please note that the Act only makes reference to evictions due to non-payment of rent. Should a tenant be in breach of other conditions of their lease then a landlord should still be able to take action to forfeit the lease.
Finally, and this may prove to be an area of contention between tenants and landlords, the term ‘rent’ as defined in the Act is “any sum a tenant is liable to pay under a … tenancy”. This is a sweeping definition and may be interpreted to include service charge and rent contributions so landlords should check carefully the defined terms within their leases as they may be exposed to three months, at least, of outgoings with no way to compel their tenants to pay.
We advise both landlords and tenants to open lines of communication at this difficult time to ensure that where possible a mutually agreeable outcome can be arranged. When this epidemic passes landlords will want tenants in situ ready to start paying (and potentially repaying) rent, and tenants will want protection from cashflow shortages and to return to premises where they have built up valuable goodwill.