Who should read this?
This article is aimed at property investors and commercial landlords and tenants to provide a breakdown on the recent Code of Practice guidance issued by the government to ease the implications of the Coronavirus outbreak affecting commercial leases.
In the recent Code, the government have recognised the pressure faced by landlords and tenants in the commercial property sector. This article will highlight the legal implications of the Coronavirus outbreak and subsequent government guidance for both tenants and landlords, should they find themselves at a detriment as a result of the COVID-19 restrictions enforced.
The Code acknowledges that all sectors, but particularly leisure, hospitality and retail sectors, are likely to have been negatively affected by the crisis. The code recognises the difficulties that many tenants are facing, particularly those affected by the closures during lockdown.
Published on 19th June 2020, the Code states:
”It is intended to reinforce and promote good practice amongst landlord and tenant relationships as they deal with income shocks caused by the pandemic.”
Why was the Code of Practice published?
The UK government recognised when the lockdown governmental measures were put in place that this would present unprecedented challenges to both landlords and tenants, while some of the restrictions have been recently lifted, the economic impact of Covid 19 will be felt for some time.
The code also provides guidance to the sectors that support the commercial property sector such as commercial lenders by enacting a moratorium on forfeitures and associated measures such as business rate reliefs and the CIBLS loan scheme to assist the economy to recover swiftly.
With the economy in mind, the government have urged landlords and tenants to “do everything reasonable to enable otherwise viable businesses to continue operating through a period of recovery”. Put simply, those tenants who could afford to pay their landlord were urged to do so in order to allow landlords the ability to offer leniency, with the Code of Practice in mind, to those who cannot afford full payment.
What is the intended outcome of the Code of Practice?
The government, when publishing the guidance to landlords and commercial tenants, aimed to ease sudden, unexpected and temporary financial strain on businesses. By encouraging landlords and tenants to enter discussions over any reasonable requests for support made by the tenants, the temporary arrangements could be the opportunity for businesses to survive when they may have been forced to permanently cease trade otherwise, thus impacting further upon the economy in the medium to long term.
Whilst the guidelines are intended to be time-limited as a result of the truly exceptional events causing unprecedented market circumstances, it is not intended to undermine or alter any existing legislation governing the relationship between landlords and tenants.
Four key principles of the guidance have been published in support of the voluntary goodwill being encouraged. These include:
1. Transparency and Collaboration
The government highlight the common interest in operating in a strong and stable economy that all businesses share, stating, “We are economic partners, not opponents”. By working transparently, in a transparent manner and in good faith, landlords and tenants can work together to improve the economy as a whole, as we begin to rebuild post-COVID.
2. A Unified Approach
The government endeavour to work together in supporting financial institutions, utility companies and other stakeholders with the joint aim of supporting the economy in its recovery.
3. Government Support
During the national lockdown, a number of subsidies were made available to both commercial landlords and tenants to assist in covering costs (for example, the Job Retention Scheme, which helped to pay wages whilst employees were furloughed).
4. Acting reasonably and responsibly
In doing so, the impact of COVID-19 will be recognised and considered to agree upon where mutual solutions are required most.
How do the guidelines impact commercial tenants and landlords?
The guidance given by the government is voluntary and provides a variety of ways landlords and tenants could choose to collaborate together for a mutually beneficial solution. As the relationship between landlord and tenant is defined by law, both landlords and tenants are encouraged to seek legal advice prior to any agreements being drafted and signed.
The restrictions imposed on landlord’s remedies for recovery of debts due during the Covid 19 crisis include:
Restriction on forfeiture of commercial leases
Most commercial leases will have a forfeiture clause enabling a landlord the right to change the locks in the event rent remains unpaid for a period of time, Section 82 Coronavirus Act 2020 implements a moratorium for any forfeiture between 26th March to 30 September 2020 for non-payment of rent. The period may be extended in any further regulations and applies to forfeiture by court proceedings and peaceable re-entry.
The forfeiture moratorium is applicable to all commercial leases including these who are protected under the Landlord and Tenant Act 1954. Consensual forfeiture appears to be prohibited under Section 82 and will depend on the facts of a case.
Stay on possession proceedings
Under Practice Direction 51Z all possession proceedings are stayed for 90 days from 27th March until 23 August 2020. There is an exception for claims against unknown persons. The Civil Procedure Rules have been updated for stay of possession proceedings CPR 55.29 under the Civil Procedure (Amendment No.2) (Coronavirus) Rules 2020
· Prohibition on Statutory demands and Winding up
There is a prohibition on the presentation of a winding-up petition based on an unsatisfied Statutory demand between 1 March 2020 and 30 September 2020. Under The Corporate Insolvency and Governance Act, unless it can be shown that the Coronavirus has not worsened the debtor’s financial position a petition is unlikely to be successful.
Prevention of recovery under Commercial Rent Arrears Recovery (CRAR)
Landlords are prevented from using the remedies available under CRAR during Covid 19. Under The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020. The regulation provides that at least 6 months rent is due (previously 3 months) rent was due before this procedure can be used. This means that a tenant who has failed to pay the June quarter (24th June 2020) rent would not be exposed to CRAR until at least 31 December 2020.
As a landlord, you may wish to consider seeking support from your financial lender, in order to ease the pressure on both yourself and your tenant. Many lenders are offering payment holidays and similar schemes to ensure businesses can focus on staying afloat without unnecessary additional stressors. You may also consider how far you are willing to negotiate with your tenant.
For tenants the governmental measures that were put in place during the lockdown prohibiting the opening of businesses in particular within the retail, leisure and hospitality sectors. However, despite the government measure’s tenants are obliged to continue to comply with their legal obligations.
Lease obligations to stay open
Some retail leases have specified operating/ open hours clauses which may be in breach due to the change in regulations. The courts are generally reluctant to order specific performance to keep open provisions to force tenants to re-open, however once the governmental measures and regulations are relaxed the obligations to stay open are likely to become applicable.
Tenant’s should review their lease terms on their requirements to ensure they do not breach any of the lease covenants. This can include the reduced opening hours, keeping premises safe and secure while they are not occupied.
If there is a break clause provision in the lease this would be an opportune time for the tenant to consider exercising the break provisions in accordance with the terms of the lease. Careful consideration should be made that the notice and application of the break clause is in accordance with the terms of the lease.
This article is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter. If you require specific legal advice on any issue relating to alternative dispute resolution clauses in your commercial agreements, you can book a free 15 minute consultation with Avinder Laroyaby clicking here