The government announcement on 20 March that all leisure and hospitality businesses should close with immediate effect was followed late on 23 March by the more widespread lockdown that we all continue to live under today. It is currently unknown when this will be lifted.
However, the UK’s rental obligations did not cease. On 25 March, businesses across the country were due to pay their quarterly rent. In the run-up to the quarter day, many concerned business tenants had already approached landlords requesting rent concessions. Given that most commercial leases contain a landlord’s right to forfeit a lease for non-payment of rent after a short grace period – often 14 or 21 days – they were rightly worried, even if the likelihood of landlords forfeiting leases currently is very low. Even before the formal lockdown, certain sectors of the economy could see income levels falling off a cliff and potentially the loss of their premises as well if quarterly rents were not paid.
But two days before the quarter day, the government announced that commercial tenants would be protected from eviction until 30 June 2020 if they could not pay their rent because of coronavirus. This promise became what is now section 82 of the Coronavirus Act 2020, which was passed on 25 March 2020.
The objective of the legislation is that the section 82 moratorium applies to all commercial leases, and “rent” means all sums due under a lease. The moratorium on forfeiture until 30 June 2020 – which could be extended – was welcomed; however, it should not be seen as complete protection for tenants.
Landlords’ other options
The moratorium on forfeiture does not mean the rent or any other amounts falling due are not payable, and landlords can still reach for other tools to recover the rent. This includes normal court action for a debt, drawing down rent deposits, potentially Commercial Rent Arrears Recovery (CRAR), pursuing guarantors or former tenants who have given an authorised guarantee agreement or serving a statutory demand for unpaid rent. With reports that statutory demands – the service of which is not subject to any grace period, unlike forfeiture action – are already being served or threatened for the unpaid March rent, those businesses are facing a 21-day countdown before a winding-up petition can be presented and tough choices.
It also does not prevent a landlord from forfeiting a lease for breaches other than non-payment of rent. However, any court action for possession of premises (through forfeiture) is also subject to limitations following the introduction of the new Practice Direction 51Z (PD 51Z) into the Civil Procedure Rules (CPR). PD 51Z provides that all proceedings for possession under CPR 55 are stayed for 90 days from 27 March 2020, as well as the enforcement of any order for possession.
The government’s proposed changes to existing insolvency legislation may not give much help to tenants either. While there is likely to be a suspension of wrongful trading rules backdated to 1 March 2020 to help directors making difficult decisions at this time, a moratorium on the presentation of winding-up petitions is not now currently envisaged. There is however likely to be a new restructuring procedure that will include a moratorium on hostile creditor action (including winding-up petitions) while a rescue plan is worked up. That will be small comfort for those businesses trying to survive without restructuring.
What about the banks?
It is not just tenants which are exposed. With some of the bigger institutional landlords reportedly only receiving one third of the March rent, and wider warnings that banks and lenders have to show property companies and landlords some leniency, the government is likely to face more pressure to take further action. Its coronavirus business interruption loan scheme (CBILS) has faced widespread criticism, and many businesses have been unable to access funds. The next few weeks will see whether there will be a widening of the moratorium and new legislation to restrain action against defaulting borrower landlords, where they are facing a major cash shortfall from non-paying tenants and do not have sufficient cash reserves.
The (immediate) future
With a recent survey from the British Chamber of Commerce revealing 57% of businesses do not have the cash to survive beyond three months and only 1% successfully accessing the CBILS, landlords may choose not to enforce all of their strict legal rights to immediately recover rents. If there are widespread insolvencies among business tenants, this could result in substantial rental voids for landlords, liability for business rates and a weakened economy with no obvious immediate new demand for that vacant commercial space.
Extraordinary times call for different approaches in commercial property for the mutual survival of its landlords and tenants. Landlords are engaging in a more collaborative, commercial way to deal with lease liabilities under a lockdown, but will expect certain costs, such as insurance and service charges, to be met at the very least. Proposals have included rent holidays, deferments, reduced rents and, of course, monthly rents to help with cash flow. There may be commercial opportunities to explore, including reviewing leases generally through a potential regear, removal or variation of a break or extension of the term.
The commercial property world has seen enormous change in the space of just three weeks. Whether further legislative measures will be introduced over the next three weeks once parliament returns from recess on 21 April – to protect landlords and tenants and to preserve the businesses that occupy the leisure and social spaces we meet in after lockdown – remains to be seen.
Helen Wheddon is real estate disputes partner at Stevens & Bolton LLP
