We asked Helena Davies of Brabners LLP about how C-19 is impacting business tenancies and what the future holds for the sector
““Businesses that have successfully rolled out homeworking may well look at their property needs with fresh eyes and consider making savings by reducing space””
What has been the biggest impact for your clients of C-19?
A substantial part of my work involves advising both landlords and tenants on the management of their respective portfolios. The occupied premises market has experienced a sea change over the last few weeks. Many previously stalwart tenants, currently unable to trade, have withheld rent across their properties with a view to holding on to cash. Landlords with normally buoyant real estate investments have received a fraction of their usual rental income.
In addition, we are (almost daily) discovering basic logistical problems giving rise to complicated legal issues. These involve tenants not being able to yield up vacant possession due to contractors being unable to get on site; parties unable to complete repair works or alterations within necessary contractual deadlines; difficulties serving statutory and contractual notices on empty premises due to unreliability of postal systems and process servers being prevented by police from delivering.
How does the Coronavirus Act 2020 affect the landlord and tenant relationship?
The 2020 Act introduces an array of new provisions across the sectors designed to relieve some of the financial pressure brought about by the extreme social distancing measures and restrictions on trading.
Section 82 of the Act implements an immediate moratorium on a landlord’s right to forfeit a business tenancy for non-payment of rent. The relevant period is until 30 June 2020, although that period can be extended. The section also provides that, during the relevant period, no conduct by or on behalf of a landlord, other than giving an express waiver in writing, is to be regarded as waiving the right to forfeit for non-payment of rent – a provision which appears to be designed to encourage discussion between the parties.
Whilst the statutory wording is not entirely unambiguous, by way of response to questions put by the Property Litigation Association, the Ministry of Housing, Communities and Local Government (MHCLG) has clarified a number of points.
In particular, they have confirmed that the rule applies to all business tenants in occupation (whether or not protected by the security of tenure provisions in the Landlord and Tenant Act 1954) and for non-payment of all financial obligations due under leases.
People do need to be aware that this provision is not a government sanctioned rent holiday for commercial tenants and there seems to be quite a bit of confusion in the industry about this. Although a commercial tenant cannot be evicted (for non-payment of rent or any other monies due under the lease) before 30 June 2020, the financial obligations do continue and if unpaid, will still need to be dealt with.
As such, landlords can still consider the following:
· Commercial Rent Arrears Recovery (CRAR);
· Calling upon an available guarantee, AGA or a rent deposit; and
· Suing the tenant or serving a statutory demand (as the first step in bankruptcy/winding up proceedings).
Importantly, the MHCLG comment at the end of their response note that enforcement of non-payment is being monitored and kept under review – with the implication that landlords could become further shackled if there is large scale pressure on tenants due to enforcement action that threatens the core of the leasehold market.
In practice, some landlords and tenants are trying to find a way through the situation, and we are now receiving increasing instructions asking us to advise on rent concession agreements and various other creative compromises that parties are reaching in order to ride the storm and protect both their respective interests.
How do you think the sector will change as a result of this?
One point that came up over and over again when I asked my team for their views on this question was that the property sector itself may alter significantly due to a change in requirements for space.
The already struggling retail market is likely to feel the pain of the pandemic and even the largest retail operators may need to consolidate their portfolios. Those troubles could also now spread to office occupiers.
Businesses which have successfully rolled out exclusive home working in such a rush may well look at their property needs with fresh eyes and consider making savings by reducing space. Of course, that could go the other way too – people may have missed the benefits of human contact with colleagues and felt harshly the many limitations of 100% home working!
If there is going to be portfolio consolidation, that could mean increased exercise of break options, as well as requests for landlord consents to sub-lettings and assignments, many of which could be contested if landlords are keen to hang on to covenant strength.
Another likely impact of the situation is expected to be a range of new boiler plate clauses in commercial leases to deal with the unexpected. The lack of force majeure provisions as standard, and the limitation of rent cessation provisions to physical damage of the premises will surely be reviewed by the industry. The debate about frustration of leases will no doubt continue, with the right case going through the Court system and perhaps making law.
If we are looking for a silver lining, perhaps we will see a move towards more collaborative working relationships between landlords and tenants. Many in the industry are already looking at the bigger picture and instead of insisting on strict legal rights, reaching out to one another and trying to find compromises. The flurry of rent concession agreements could signpost the start of a more constructive relationship going forward, perhaps supported by legislative change (possibly new rules for forfeiture or a revision of the 1954 Act) that compliments a more balanced approach between the parties.