Coronavirus and commercial leases
Steven Judge is a Partner and Head of the Dispute Resolution Department and can be contacted on 01323 434416 or sj@stephenrimmer.com
Advice for commercial landlords and tenants during the ongoing COVID-19 pandemic
The COVID-19 pandemic has impacted almost every industry in the UK, with many businesses experiencing a severe strain on their cashflow as a result. While tenants with commercial leases may be struggling to pay rent in full and on a regular basis, their landlord could also be under pressure if they rely on these payments to maintain their own cashflow. Both parties to a commercial lease contract should understand how their liabilities and obligations have been affected by COVID-19 and ideally work together towards a solution.
What can a landlord do if a commercial tenant is unable to pay rent?
Landlords can normally use various measures to recover rent from a non-paying tenant, however, the government has enacted legislation to protect tenants with commercial leases from both legal action and eviction until at least 30 June 2021. As such, tenants are effectively authorised to pay what rent they can afford without the threat of legal consequences until these protections are removed.
The key legislation
- The Coronavirus Act 2020 prevents lease forfeiture
- The Corporate Insolvency and Governance Act 2020 prevents landlords from issuing statutory demands or winding up petitions
Exceptions to the legislation
There is an exception to the Corporate Insolvency and Government Act if it can be shown that the debtor's financial position was not negatively affected by the outbreak or that they would have been unable to pay their debts even if the pandemic had not worsened their financial position. However, these circumstances are difficult to prove, so the moratorium is likely to protect tenants in most cases.
Rent arrears
Tenants remain liable for any rent arrears accumulated during the period of restrictions on debt recovery. Nonetheless, landlords should be aware that businesses will take time to recover after protections are removed, and they may need to exercise patience rather than attempt aggressive debt recovery. If a tenant becomes insolvent, it will be far less likely that arrears can be recovered.
Is a tenant able to withhold rent or terminate its lease?
Whether a tenant can refuse to pay rent or choose to terminate the lease early will depend on the lease. It may contain a break clause, force majeure clause, or provisions on turnover rent that allow it to do so. Nevertheless, most commercial leases ensure rent is payable without deduction or set off, and it is generally unlikely that a tenant will be able to withhold payment for COVID-related reasons.
The doctrine of frustration
Frustration of a contract occurs when a serious, unexpected event that is beyond the control of the parties makes it impossible for them to perform their contractual obligations. A tenant could potentially argue that their lease has been frustrated, however, there would be considerable scope for a landlord to challenge their claim.
Advice on how to move forward
In most cases, it will be in both the landlord and tenant's interests that the tenant's business survives the COVID-19 outbreak. Therefore, parties should negotiate solutions that see them work together to withstand the coming months, for instance, via a temporary rent reduction and structured repayment plan. With this in mind, the government has issued a voluntary Code of Practice for Commercial Property Relationships, which aims to guide negotiations between landlords and tenants.