Lockdown Guide for Commercial Landlords – Updated January 2021
This article was published on: 30th January 2021Matt Pugh
Updated January 2021
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 many will have during these unprecedented times.
The article presents a broad overview of each issue. The devil is always in the detail, and professional advice should be sought. The law stated is stated correct at 18 January 2021 but continues to evolve.
Forfeiture for Non-Payment of Rent
Landlords cannot currently forfeit a commercial lease for non-payment of rent only. These restrictions remain in place until 31 March 2021 and have been extended several times.
A tenant remains liable to pay rent accruing 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 an 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, 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. 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/impossible to take the necessary action.
Can a tenant still seek relief from forfeiture?
Yes, a tenant (and undertenants/mortgagees) retains the rights to seek relief from forfeiture by applying to Court. The Courts have a wide discretion when it comes to granting 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.
Trespassers have occupied my property – can I seek possession?
It remains possible to issue trespass proceedings, obtain an order and apply for an eviction date – advice should be sought on the most appropriate option.
Are there any restrictions on other debt enforcement methods?
In relation to three common enforcement methods:
1.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 between 25 December 2020 and 24 March 2021, that figure increases to 366 days.
There are also restrictions in place regarding where/when enforcement agents can attend property – advice should be sought directly from solicitors or enforcement agents.
2.Statutory Demands and Winding up Petitions
A landlord is prevented from presenting winding-up petitions where a statutory demand was served during the “relevant period” – 1 March 2020 to 31 March 2021.
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 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.
There are no restrictions placed on drawing down from rent deposits, except for those in the deed. It is open to a landlord to issue debt recovery proceedings and seek a County Court Judgment, although enforcement may still pose problems.
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 preventing service of a break notice, provided the contractual requirements are strictly complied with – these can be far from straightforward.
Tenants may also serve a break notice if the lease permits it, and many will no doubt be exploring their options.
Can a tenant vacate early due to the pandemic?
The starting point should always be– what does the lease say? Is there an exercisable break option?
If not, other lawful methods are available – for example, surrender by deed or operation of law.
Many tenants are also looking at alternative options, from the obvious to the ingenious. These range from claims under force majeure clauses to claims that the lease has been “frustrated” because of the pandemic. If commercial negotiations fail, many landlords can expect to be faced with these arguments if a tenant has no other options 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 lease – guidance from the Courts is expected to evolve.
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 service of a Section 25 notice, nor on a Section 26 request. This is also the case whether there is opposition to the grant of a new tenancy.
Landlords should note that if they rely on ground (b) (a persistent failure to pay rent) in opposition to a new tenancy, any failure to pay during the relevant period (currently 1 March 2020 to 31 March 2021) will be disregarded.
There are no restrictions on either party issuing renewal proceedings in the County Court.
There are 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? Can a tenant insert a “Covid Clause” covering future closures and rent rebates? Guidance is expected from the Courts in due course.
Are dilapidations claims affected?
There have been no specific changes to dilapidations claims or restrictions imposed. In principle, claims may still be brought under the relevant lease provisions during and/or after the fixed term.
There might be practical issues to grapple with. Before pursuing a claim, a surveyor will ordinarily inspect the property and collate evidence in preparation of a schedule. Our experience suggests 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, particularly during lockdowns or areas in higher tiers.
There will also be complex legal questions to consider. Terminal claims for damages (those issued after the end of the term) are capped by reference to Section 18(1) of the Landlord and Tenant Act 1927, and the damage to the value of the reversionary interest caused by the disrepair.
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 pandemic and any economic downturn in the market reasonably foreseeable at that point by a hypothetical purchaser? Expert valuation advice should be sought.
Can the Tenant change the use of the property?
There have been recent changes to planning user classes which aim to provide for a more flexible use of commercial premises for tenants; further detail can be found in our article here.
Many let buildings are currently standing empty due to restrictions on trade or tenants vacating property.
Landlords should check existing insurance policies and 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 appropriate insurance.
Is help available for landlords struggling to pay a 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 realistic option is to speak with the lender to see what options are available – evidence suggests support will differ from lender to lender and there is no hard and fast rule.
Are the Courts still open?
The Courts are still operating, but are encouraging the use of remote hearings (by CVP, telephone or Skype) where appropriate, rather than in-person trials. 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.
The Courts are experiencing a high backlog in cases, so delays in progressing a claim will be inevitable.
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 principles and factors which landlords and tenants should consider where a tenant is facing financial hardship. A list of practical examples is provided. 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 Current Restrictions
As stated above, most restrictions on certain enforcement methods remain in place until 31 March 2021. As that date approaches, debate will continue as to whether that period should be extended still further – the economic outlook may determine the outcome of that debate, but the Government has already announced that these restrictions “cannot last forever”.
Furloughed Space Schemes
We are all familiar with furloughed employees, but an 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.
Development and Reform of the LTA 1954?
Case law is expected to address specific disputes between landlords and tenants in relation to both rental values and “Covid provisions” – many tenants seek the inclusion of clauses allowing for rent rebates during future lockdowns imposed by pandemics. Is inclusion of such a term reasonable in light of all relevant circumstances, where previous agreements did not include such a provision?
On 9 December 2020, Robert Jenrick MP also announced a review of “commercial landlord and tenant legislation” and in particular part II of the Landlord and Tenant Act 1954 (concerning security of tenure for business tenants). Further information is yet to be released.
The Bigger Picture
The pandemic is causing fundamental shift in many long-established attitudes towards ways of working and the built environment. 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 there has been much discussion of what the future of the workplace looks like – the answer differs greatly from sector to sector, and business to business.
The one certainty is that there will continue to be rapid change – we will keep you up to date with those changes throughout.
If you would like more information about the issues raised in this guide email email@example.com or telephone 0330 320 1440.