Lockdown Guide for Commercial Landlords – Updated 25 September 2020
This article was published on: 11th September 2020Matt Pugh
Updated 25 September 2020
We previously published a guide for residential landlords and letting agents, to assist those struggling to keep up with the pace of change in the current climate. The commercial property sector has seen equally rapid change, and this guide for commercial landlords aims to answer questions which landlords may have during these fast-changing times.
The article presents a broad overview of each issue. As ever, the devil is in the detail, and professional advice should be sought. The law stated is stated correct at 18 September 2020 but continues to evolve on an almost daily basis – we will continue to review and update this guide periodically.
Forfeiture for Non-Payment of Rent
Landlords cannot currently forfeit a commercial lease (by re-entry or possession proceedings) for non-payment of rent only. These restrictions will remain in place until 31 December 2020, unless extended further.
A tenant is still liable to pay rent which accrues during this period. Importantly, a landlord will not be deemed to have waived the right to forfeit for non-payment of rent during this period, unless it expressly confirms its intention to do so.
Forfeiture for Other Breaches
There have been no additional restrictions placed on a landlord’s right to forfeit for other breaches. A Section 146 notice must be served in the usual manner, setting out the breaches and providing a reasonable period for the tenant to remedy those breaches (which are capable of remedy).
What constitutes a “reasonable period” may in certain cases be considered longer than it was before the pandemic began. This will be assessed on a case-by-case basis, considering factors such as difficulties accessing the property or other restrictions which would render it difficult or even impossible to take the necessary remedial action.
Can a tenant still seek relief from forfeiture?
Yes, a tenant (and undertenants/mortgagees) retains the rights to seek relief from forfeiture for non-payment of rent or otherwise, by applying to Court. The Courts have a wide discretion when it comes to granting or refusing relief. Some Judges may be more willing to grant relief where the tenant can show the breach(es) can be linked to factors arising from the pandemic and from previous lockdowns.
What if there are other grounds for seeking a Possession Order?
Unless there are specific restrictions in place (such as those on issuing forfeiture proceedings), restrictions on issuing and progressing possession claims are due to be lifted on 20 September 2020. Claims can be issued, and warrants enforced, from this date. There are specific and, in some cases, complex new rules in place for “re-activating” previously stayed cases and issuing new claims after that date – legal advice should be sought.
Trespassers have occupied my property – can I seek possession?
It remains possible to issue trespass proceedings, obtain a possession order and apply for an eviction date – advice should be sought on the most appropriate option available.
Are there any restrictions on other debt enforcement methods?
There are typically three common enforcement methods used:
- Commercial Rent Arrears Recovery (“CRAR”)
The CRAR procedure is still available to landlords but rent must be 276 days in arrears if starting the process on/before 24 December 2020. If the process is started on/after 25 December 2020, that figure increases to 366 days. From 1 January 2021, those restrictions are due to lift, meaning the minimum figure will reduce back to seven days.
There are also certain restrictions in place regarding where/when enforcement agents can attend property – advice should be sought directly from solicitors or enforcement agents.
- Statutory Demands and Winding up Petitions
The Corporate Insolvency and Governance Act became law on 26 June 2020. Extensions to current restrictions will take effect on 29 September.
A landlord is prevented from presenting winding-up petitions where a statutory demand was served during the “relevant period” – 1 March 2020 to 31 December 2020.
Further restrictions are also imposed on all other winding up petitions presented during the relevant period. These restrictions would capture petitions relating to unpaid Judgments or statutory demands served outside the relevant period.
In relation to those other petitions, a landlord can seek to avoid the restrictions and obtain a winding up Order. To do so, it must prove there are grounds for believing coronavirus has had no financial effect on the company. Alternatively, it must show that the grounds for winding up would have arisen regardless of any financial effect coronavirus did have. There is limited authority on how this test will be applied currently.
- Other Methods
There are no further restrictions placed on drawing down from a rent deposit, except for those agreed between the parties. It is open to a landlord to issue debt recovery proceedings and seek a County Court Judgment, although enforcing a Judgment may be more difficult in light of winding up restrictions.
There are no new limitations on pursuing a guarantor and, in very specific scenarios, it might also be possible to take action against a former tenant where the lease has been assigned.
Can I serve a break notice?
There are no restrictions in place which prevent you from serving a break notice, provided the contractual requirements are strictly complied with – these can often be far from straightforward.
Tenants may also serve a break notice if the lease permits it, and many will be exploring their options.
Can a tenant vacate early due to the pandemic?
The starting point should always be to ask – what does the lease say? Is there a break right available? It also remains possible to negotiate a surrender.
Many tenants will also be looking at alternative options, from the obvious to the ingenious. These range from claims under force majeure (i.e. “act of God”) clauses to claims that the lease has been “frustrated” because of the pandemic. If commercial negotiations fail, landlords should expect to be faced with these arguments if a tenant has no other options available to it and is committed to leaving early.
These options are unlikely to present a straightforward solution and many of the arguments have rarely been tested in the context of commercial leases.
Can I serve a Section 25 notice and issue lease renewal proceedings under the Landlord and Tenant Act 1954?
No restrictions have been placed on a landlord’s ability to serve a Section 25 notice, nor on a tenant’s ability to serve a Section 26 request. This is the case whether you are opposed to the grant of a new tenancy or offer new terms. There may be difficulties in ensuring valid service in accordance with the Act, but these can usually be overcome through use of a process server.
Landlords should note, however, that if they rely on ground (b) (a persistent failure to pay rent) in opposing a new tenancy, any failure to pay during the relevant period (currently 1 March to 30 September 2020) must be disregarded.
Equally, there are no restrictions on either party issuing renewal proceedings in the County Court.
There will of course be specific issues arising from the pandemic which will affect negotiations and terms. To what extent will rental values be affected by the downturn? How much time will the Court consider to be a reasonable period in which a landlord must be ready to commence a redevelopment, where opposing the grant of a new lease on that basis? Many of these questions are likely to be answered in future cases.
How might dilapidations claims be affected?
There have been no specific changes to dilapidations claims imposed by the Government since the lockdown began. In principle, claims may still be brought under the relevant lease provisions during and/or after the fixed term.
There might, however, be practical issues to grapple with. Before pursuing a claim, a surveyor will ordinarily inspect the property and prepare a schedule of items of disrepair, supported by photographic evidence. Our experience suggests these inspections are increasingly going ahead as planned, but certain restrictions will remain in place and there may be considerations surrounding social distancing and compliance with Government guidelines. Forward planning will be key.
There will also be more complex legal questions to consider. Terminal dilapidations claims (those issued after the end of the term) are capped by reference to Section 18(1) of the Landlord and Tenancy Act 1927. Where appropriate, an expert valuer will usually be instructed to value the property in the condition it was returned in but also in its “lease-compliant” condition.
To what extent can/should the pandemic be factored into that valuation exercise? For leases which terminated after the lockdown took effect these could be key questions. What about leases which terminated earlier? Was the lockdown and any economic downturn in the market reasonably foreseeable at that point? Expert valuation advice should be sought.
Can the Tenant change the use of the property?
Many tenant businesses, particularly those in industries such as food and hospitality, are looking to be creative and change their offering to make up for lost income. A common example might be a restaurant operating a temporary take-away service.
Whether this is permitted will depend on the terms of the lease, and the permitted class of user. Using the above example, it is by no means a given that a business operating a restaurant will be permitted to serve food to be consumed off the premises.
This might place the tenant in a tricky position – unlike certain other requests, a landlord is under no obligation to not unreasonably withhold or delay consent – it is at the landlord’s discretion. In most cases, there may need to be a temporary or permanent variation of the lease and commercial negotiations are likely to follow. There may also be planning considerations.
There have been recent changes to the planning user classes which aim to provide for a more flexible use of commercial premises; further detail can be found in our article here.
Many buildings (or parts of buildings) which have been let to tenants are currently standing empty through no fault of the tenant.
Landlords should check existing insurance policies and any provisions set out in the lease concerning insurance obligations – is the tenant under an obligation to notify the landlord where premises are to be left empty? If in any doubt, insurers should be informed, and it may be necessary to consider obtaining unoccupied building insurance.
Is there help available for landlords struggling to pay their mortgage?
The Government has previously announced that mortgage lenders have agreed to offer payment holidays of up to three months where required due to “Coronavirus-related hardship”, but these announcements have largely been focused on residential buy-to-let mortgages.
As a commercial landlord, the only real option will be to speak with your lender to see what options are available – evidence suggests support options will differ from lender to lender and there is no hard and fast rule.
Are the Courts still open?
The Courts are still operating and a number of “Nightingale Courts” have been opened for the first time to try and deal with an anticipated backlog of cases, not least possession claims.
In many cases, the Courts will accept e-mail filing of documents and many of the Courts and Tribunals will actively encourage e-mail correspondence.
The Courts are encouraging the use of remote hearings (by CVP, telephone or Skype), as an alternative to face-to-face, but only where appropriate. It is accepted that certain hearings cannot properly proceed remotely. There are also many online Court services available which remove/limit the need to use post and e-mail.
New Landlord and Tenant Code of Practice
On 19 June 2020 the Government announced it had worked with leading businesses and trade associations to publish a Code of Practice for commercial property relationships during the COVID-19 pandemic.
The Code sets out overarching principles and factors which landlords and tenants should consider where a tenant is facing financial hardship. A list of non-exhaustive practical examples is provided of arrangements which might be put in place. The Code is entirely voluntary, however, and so it remains to be seen to what extent the industry will adopt,or ignore it. Further information can be found in our article here.
The property sector faces many challenges to come, as many tenants have seen their income decrease, and rent arrears accrue. From a litigation perspective, some of the key forthcoming issues are likely to be:
The Extension of the Corporate Insolvency and Governance Act
As stated above, the Act imposes restrictions until the relevant period expires on 30 September 2020. As that date approaches, debate will continue as to whether that period should be extended – the economic outlook may determine the outcome of that debate, but the Government has already announced that these restrictions “cannot last forever”.
Extension of Restrictions on Forfeiture, CRAR and Winding-up Petitions
The Government is likely to face continued pressure to extend existing deadlines still further, and the issue will become more urgent as each deadline approaches.
There has been recent publicity to suggest the Government may restrict the use of evictions during the Christmas period and in places which are subject to temporary local lockdown measures. Further detail will follow as it is released.
Furloughed Space Schemes
We are all familiar with furloughed employees, but another idea which has been raised with less publicity is the prospect of furloughing commercial property – certain newspapers have reported that the Government was in discussions with industry representatives in respect of a “furloughed space grant scheme” (FSGS).
The FSGS envisions a form of sliding-scale taxpayer funded relief where tenant businesses have seen their turnover reduce or the business has ceased to trade. Please see our earlier article for a full summary of the proposals.
The prospect of an increase in turnover rents being agreed has gained much publicity in recent months. Many parties see this as just one way in which landlord and tenants can work together in battling through the downturn and sharing in any recovery.
We analyse the advantages and disadvantages of turnover rents in our article here.
The Bigger Picture
The pandemic looks likely to cause a fundamental shift in many long-established attitudes towards ways of working. Restrictions will remain as businesses begin to re-open which could require a re-think of property configurations. The requirements of tenants are likely to evolve alongside these changes and recent developments are likely to only hasten society’s discussion of what the future of the workplace will look like.
In the immediate future, we expect that landlords and tenants will need to be open to the possibility of commercial arrangements if a future relationship is going to continue to be financially viable. The possibility of taking enforcement action is one thing, but if a landlord intends to re-let the property after seeking possession, how many viable commercial tenants are there in the market currently who will take a new lease at previous rental levels?
The one certainty is that there will continue to be rapid change – we will keep you up to date with those changes throughout.
If would like more information about the issues raised in this guide email email@example.com or telephone 0330 320 1440.