Protection for commercial tenants: rental payments during coronavirus

Commercial leases often include forfeiture provisions enabling landlords to re-enter the premises where tenants have failed to pay rent for a certain period or where tenants are in breach of the lease.

In the Coronavirus Act 2020, the Government has announced that it will protect commercial tenants as landlords will not be able to forfeit the lease during the next three months. These measures apply until 30 June 2020 but could be extended if the Government decides this is necessary.

These measures apply to any tenancy which has security of tenure for the purposes of the Landlord and Tenant Act 1954, or which would have such protection if it had not been contracted-out.

How will this impact commercial tenants?

• Landlords will have a right to forfeit and recover any rent arrears again from 1 July 2020 so tenants should be cautious about not paying their rent at all.
• No conduct by or on behalf of landlords during the three month period will waive landlords’ rights to forfeit for non-payment of rent. This could leave commercial tenants exposed to forfeiture after expiry of the protection period.
• Non-payment of rent could include annual rent, insurance, service charge payments and interest as interest will accrue on unpaid sums during the protection period if the lease provides for this.
• This legislation will give peace of mind to commercial tenants who run small businesses and are concerned that they will not be able to pay their rent for the next few months as they have had to close due to the coronavirus.

What should commercial tenants do next?

• Where possible, commercial tenants should continue to pay rents.
• Commercial tenants should plan ahead from now by discussing entering into payment plans with landlords in order that any rent arrears can be paid once the protection period has passed.

Position of Landlords: Rental payments during coronavirus

Although Parliament is protecting tenants from eviction as a result of enacting the Coronavirus Act 2020, the Government is also looking to protect landlords from the impact of tenants not being able to pay their rent by recommending that they enter discussions with tenants to agree alternative payment plans.

How will the Coronavirus Act 2020 impact landlords?

• It is likely that many landlords will encounter cash flow difficulties as tenants may be unable to pay rent for the next few months due to the impact of the coronavirus.
• Where landlords are struggling with cash flow difficulties from tenants not paying rent, they can speak to their lenders to see if the lenders would allow a three month mortgage payment “holiday” which would defer mortgage payments for landlords for the next three months. Although lenders are not required to agree to this, they may do so in light of the current climate and if the landlord asking for a mortgage “holiday” has made payments on time and in full to date.
• All new evictions are suspended and landlords cannot bring new possession proceedings to obtain possession of their property unless the notice provisions above have been complied with.
• Housing associations and Local Authorities also fall into the category of those who will not be allowed to evict tenants who are affected by the coronavirus and do not pay their rent.
• It remains unclear whether landlords will be entitled to demand interest on deferred rent payments.

What should landlords do next?

• Landlords should work closely with their tenants to discuss different options which will help their tenants during this period of cash flow difficulties. It should be noted that the Government intends to amend the existing Pre-Action Protocols to include private landlords.
• Landlords could discuss the following payment options with their tenants depending on the circumstances:
  • Suggest that weekly payments of rent are accepted instead of monthly payments;
  • Offer a rent discount for a certain period;
  • Allow a temporary rent free period;
  • Agree a rent deferment so that rent is paid on an agreed later date;
  • Agree a payment plan for rent which has been deferred, for instance the deferred rent may be payable on an agreed date in full or spread over instalments; or
  • Have regard to the requirements of the amended Protocol when it comes into force.
• Anything agreed between landlords and tenants should be formally documented in writing to avoid any temporary concessions becoming permanent variations to the lease and where there are any guarantors, they too should be a party to any such side letter.

Comment

On the whole, the Government is encouraging landlords and tenants to work together through this difficult and unprecedented time. A positive which may come from this is that landlords and tenants may communicate better going forward which could result in improved landlord and tenant relationships in the future.