A landlord is not obliged to accept a request for rent reduction or suspension. However, it may not be able to enforce the obligation to pay rent if it has closed premises or made them impossible to use without this being required by the Government. Here are some remedies that a landlord might be able to use:
A landlord faced with unpaid rent may be able to avail itself of any rent deposit. It could attempt to require the tenant to top up the deposit. If the premises are closed or incapable of beneficial use save as a result of a Government requirement, a court may say that the deposit has been used as a result of the landlord's breach of the lease and refuse to enforce the terms of a rent deposit deed.
A guarantee, including any AGAs, will be enforceable to the extent that the tenant's breach of covenant is properly enforceable against the tenant. The guarantor usually has the same defences to a claim by a landlord as the tenant has. Subject to this and the validity of the guarantee, landlords can continue to recover under guarantees.
Court claims for payment of rent
Landlords can still start court claims to recover rent as a debt.
If a landlord shuts premises without a tenant's agreement or Government requirement and then brings court proceedings to recover unpaid rent, the tenant would be likely to counterclaim for losses resulting from the closure and a court would almost certainly award the tenant damages amounting to the rent that they would have paid, other charges under the lease and losses arising from any loss of business. This would more than set off the amount owing for rent and other charges.
With the suspension of forfeiture for unpaid rent resulting from Coronavirus, the Government may provide more general recommendations or requirements for how arrears of rent occurring now are to be recovered. Courts may not want to process debt claims for rent quickly.
Commercial Rent Arrears Recovery ("CRAR")
The Government has announced that it will put in place legislation to prevent landlords using the CRAR statutory regime unless they are owed rent for 90 days or more. The minimum amount of arrears was previously 7 days. Effectively this will mean that even if a premises stays open for trade, CRAR cannot be used against the tenant for non-payment of the March quarter's rent until the end of June 2020. It is not yet known which commercial tenants will benefit from these arrangements (for example, whether it is limited to tenants in the retail, hospitality and leisure sector) or what a tenant would have to provide to evidence that it cannot pay its bills due to the epidemic. We continue to monitor this.
Threats to wind up
As the March 2020 quarter has progressed, there has been an increased use by landlords of statutory demands for rent arrears. If a statutory demand is not paid this is prima facie evidence that a tenant is insolvent. Statutory demands do not need to be sent to a corporate tenant before petitioning to wind it up but landlords find this a useful way of applying pressure to force payment if a tenant is not genuinely insolvent.
A statutory demand may result in a breach of lending covenants or other embarrassment for a tenant as well as the risk that a landlord will proceed to petition to wind up a tenant. Similarly a winding up petition can be used to pressurise a tenant to pay rent as it must be advertised and will become public knowledge if it proceeds to a winding up hearing in court. On 23 April 2020, the Government announced temporary measures to protect commercial tenants from landlords using statutory demands and winding up petitions to force payment of rent. This will be contained in the Corporate Insolvency and Governance Bill.
The measures will include a temporary ban on the use of statutory demands to provide evidence of insolvency and winding up orders where a company cannot pay their bills due to coronavirus. It is not yet known which commercial tenants will benefit from these arrangements (for example, whether it is limited to tenants in the retail, hospitality and leisure sector) or what a tenant would have to provide to evidence that it cannot pay its bills due to the epidemic. We continue to monitor this but this is likely to improve the negotiating position of tenants in requesting rent concessions and repayments plans as set out above. We have already seen tenants starting to use this in negotiations.
Arrears of rent is the ground for forfeiture that entitles a landlord to change locks without notice. The Coronavirus Act (the "CA") has made it illegal to forfeit leases to which Part 2 of the Landlord and Tenant Act 1954 ("Pt2 LTA 1954") applies for arrears of rent until 30 June 2020 and possibly longer. The Ministry of Housing, Communities and Local Government (the "MHCLG") has stated that this is intended to apply to all commercial leases whether or not they fall within Pt2 LTA 1954. It has not clarified whether this applies to commercial leases when the tenant is not in occupation. We think it must as otherwise a superior landlord could forfeit an intermediate commercial lease thereby terminating an occupational sub-lease subject to any application for relief.
Rent is defined in the CA as any sum a tenant is liable to pay under a relevant business tenancy. The MHCLG confirms that this relates to any sum and not just any sum that is reserved as rent under the lease. The CA includes existing arrears within this protection and so it would seem that the arrears do not have to be arrears that accrue in the March 2020 quarter alone. This, together with the proposed temporary ban on statutory demands and winding up proceedings, is likely to give tenants a stronger negotiating position when seeking to agree rent suspensions.
These protections do not prevent a landlord from taking steps to forfeit for other breaches of lease. Most leases will contain forfeiture rights on the happening of various insolvency events. If this includes balance sheet insolvency, many tenants are likely to face being in this situation as their cash reserves are used during the current period of no trading. The MHCLG has stated that it will monitor the position in relation to other landlord actions such as winding up. It is possible that a moratorium may also be placed on forfeiture as a result of insolvency.
Currently, the legislation does not change the position in respect of existing enforcement action. Whilst tenants that go into arrears of rent will be protected from eviction in the short term, they will need to repay the arrears in full plus accrued interest once the protection is lifted (be that 30 June 2020 or later if the UK Government extend the arrangements) to avoid facing forfeiture (or other) proceedings at that point.
Keep open clauses
Leases which contain rents calculated on the basis of turnover, particularly in the retail sector, often oblige tenants to stay open for business during normal opening hours. Where footfall and has dropped significantly for tenants, they will be considering closing premises.
Courts can require tenants to keep premises open. This is usually only the case where a tenant is an anchor store or has some other special significance to a landlord. A court has discretion whether to award specific performance or damages for loss of profit as a remedy for a tenant's failure to keep premises open. In the present circumstances with little footfall and poor trade, the balance of convenience between the landlord and the tenant is likely to persuade a court to refuse a claim by a landlord for specific performance. Instead the court is more likely to award damages for loss. This is particularly the case if the nature of the premises means that the tenant is required to close. The Government's instruction of 20 March to cafes, pubs, restaurants and other leisure venues to close will mean that a court will not require these to remain open in contravention of the law.
Recovering rent directly from sub-tenants
When a tenant is in arrears of rent, a landlord is permitted by section 81 of the Tribunals, Courts and Enforcement Act 2007, to serve a notice on any sub-tenant of the premises requiring it to pay rent directly to the landlord until the arrears have been cleared. While in principle this offers an alternative way of getting rent paid, we expect that landlords will not be permitted to forfeit the intermediate lease if the sub-tenant does not pay. As a result this may not offer an effective way in which to get full rent paid.
The proposed temporary ban on issuing statutory demands and/or winding up proceedings does not appear to prevent landlords from taking these steps against a sub-tenant where section 81 applies.