Lawrence Stephens

We are a *knowledge business

The Government’s attempt at ‘Squashing the Sombrero’: will banning evictions for 3 months on Commercial Tenants really solve the problem?

March 2020

I miss Brexit. 

In light of the strict lockdown on 23 March 2020, the Government have implemented further concessions to assist tenants in the short-term and announced that commercial tenants who are affected by Covid-19 will avoid being evicted for 3 months. 

As a point to note, the timing of this support virtually coincides with the standard fiscal quarters and therefore, commercial landlords will be anxious to ensure that when 24 June 2020 arrives (subject to whether the Government introduce further concessions), they fully understand what rights and provisions are contained within their leases. 

What happens if a tenant fails to pay rent after the 3-month eviction ban?

Commercial leases set out various rights for landlords when tenants breach their rent obligations. Typically, rent in a commercial lease will be payable quarterly or monthly. If this 3 month period is not extended, tenants will still be liable for rent payments and landlords will be able to rely on their remedies under their leases. 

Generally (you need to check the lease), as soon as a payment date is missed, default interest is due.  The default rate may be a stated interest rate above base rate (which, having just dropped will affect the default rate) or may be calculated by reference to another rate such as the Late Payment of Commercial Debts (Interest) Act 1998 which is a minimum of 8% per annum.

There are also other remedies available for landlords: the commercial rent arrears recovery (CRAR) regime which is an enforcement procedure allowing a landlord to take control of a tenant’s goods and sell them in order to recover the rent arrears, the landlord pursuing a guarantor under the lease or a rent deposit might be available which the landlord can drawdown to recover the rent arrears. 

The landlord’s strongest weapon is a right to ‘forfeit’ the lease. This is when a landlord ends the lease and takes back the property due to the tenant breaching the covenants in the lease including, for example, the non-payment rent. The landlord is entitled to peaceably re-enter the property without permission from the Court.

The time scale before a landlord can peaceably re-enter varies (you need to check each lease), but is very often where the rent has been outstanding for 21 days – ‘the grace period’. On the 22nd day, the landlord can forfeit the lease. It is also important to note that peaceable re-entry must be specifically referred to as a remedy in the lease. 

What can tenants do to protect themselves?

If rent is unpaid by the end of the grace period before forfeiture, the landlord may forfeit the lease. However, the landlord will ‘waive’ their right to forfeit the lease if they accept any sums paid as rent at any point in the payment period and up until the end of the grace period.

Clearly, a landlord will have a dilemma on its hands if the tenant pays part of the rent. The landlord could reject the sum in its entirety and retain its right to forfeit (you need to be extra careful with electronic payments not to inadvertently keep the sum and thereby waive the breach).  A landlord will need to repay the money as soon as reasonably practicable, so that it cannot be argued that rent was accepted and the landlord will not have waived the right to forfeit the lease. Of course the risk to the landlord is if the tenant does become insolvent the landlord may be left even more significantly out of pocket. 

Given the challenging market conditions and with half a million of UK companies in distress, a viable short term solution for tenants following this 3-month period (assuming the government does not introduce further measures), is for tenants to continue to regularly pay a reasonable sum even if they are not making the full rent payments. 

Concessions which have been offered for tenants

The government has introduced a package of measures during this crisis to relieve small businesses of short term financial difficulties. 

On top of the 3 month ban on evictions, the measures include: business in the retail, leisure and hospitality industries will get a one-year break from paying business rates, these businesses will also receive a £25,000 grant whose rateable value is between £15,000 and £51,000, the next quarter of VAT payments will be deferred, a new temporary loan scheme for businesses of up to £1.2 million will be available, and small businesses with fewer than 250 employees will be able to claim back in full from the government up to 14 days of statutory sick pay per employee affected and the UK. 

Why a Landlord shouldn’t be too quick to forfeit in Q3 even when they can

From a practical perspective, it may be wise for landlords and tenants to discuss how to pull through this difficult time. The reality is that in most cases a replacement tenant will be hard to find. Aside from that, there is the clear value to showing loyalty and investing in a landlord tenant relationship.

Although there are no quick-fix answers, the above protection for tenants will provide small and medium businesses with a short term liquidity boost which many businesses desperately need. However, the elephant in the room remains that if sites aren’t trading with revenues being close to zero, how will commercial tenants be able to afford the rent payments due for the next quarter. David Page, chairman of the Fulham Shore neatly summed up the current position for commercial tenants in that the government’s intervention was ‘not enough – without a lease forfeiture moratorium on unscrupulous landlords grabbing back premises for free on the coming rent quarter day, there will be no employers left in retail or restaurants to claim 80 percent back’.