Legal briefing | Real Estate |

COVID-19: Rent mitigation negotiations between landlords and tenants

Overview

Tenants are approaching their landlords to ask for assistance in mitigating their financial situations.  They are requesting rent holidays, rent reductions, and monthly as opposed to quarterly rent payment schedules.  Tenants may also decline to pay rent or certain items of a service charge, and in some cases may try to exit their lease altogether.

Some tenants will be close to insolvency if they cannot reduce their liabilities. For them in particular, it may be difficult to justify giving landlords a preference by paying rent quarterly in advance for premises that are shut or barely trading when other business payments may only be due in arrear or on a monthly basis.

We have seen several different types of request from tenants in respect of payments under leases. We provide comments on these below, on the assumption of standard commercial lease terms.

The Coronavirus Act 2020

The Government's Coronavirus Act prevents landlords from seeking to forfeit leases falling within Part 2 of the Landlord and Tenant Act 1954 for arrears of rent, until at least 30 June 2020. The Ministry of Housing, Communities and Local Government has explained that this is intended to apply to all commercial leases whether or not they fall within Pt2 LTA 1954, and that rent includes all sums, including for example service charges, due under the lease.

At the end of this period, unless landlords and tenants have made other arrangements, or further legislation is enacted, landlords will again be able to seek forfeiture where tenants are still in arrears of rent. We have seen lots of correspondence between tenants and landlords in the interim, trying to agree arrangements in respect of these payments in advance of 30 June 2020.

Corporate Insolvency and Governance Bill

On 23 April 2020, the Government announced temporary measures to protect commercial tenants that will be reflected 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. 

The Government is also to put in place legislation to prevent landlords using the Commercial Rent Arrears Recovery statutory regime unless they are owed rent for 90 days or more. 

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.

Tenant requests to pay less rent

We have seen requests from tenants to pay less rent for a fixed period of 3 or 4 months, for the period during which the Covid-19 virus affects trade and/or for the remainder of a lease. Sometimes these requests are coupled with a proposal to pay the arrears caused by the reduced rent at a later date.   

Leases, except where rent is entirely calculated by turnover, do not contain provisions allowing reductions in rent.  At present, rent can only be reduced or delayed by agreement between a landlord and a tenant.

If a landlord is prepared to negotiate a change to the tenant's rent payment obligations under the terms of its lease, and has the consent of its lender and landlord if required, then this arrangement should be documented. If it is not, there is a risk that a tenant may subsequently claim that the landlord has lost its right to enforce the lease terms by way of waiver or estoppel.

A change in rent payment terms can best be recorded in a side letter. This is preferable to a deed of variation of a lease, as a variation is more time consuming to negotiate and may bind successors in title.

The Government is currently consulting with various landlord bodies about further possible measures in respect of non-payment of rents. Landlords should consider reserving rights to revisit any rent concessions they put in place if the Government announces measures for support with unpaid rent.

Tenant requests to suspend rent payments for a period

If a landlord is willing to suspend payment of rent for a limited period, the parties should try to record this arrangement. The landlord could confirm that it will permit suspended payment of rent on specific quarter days or other payment days for a limited period and will expect payment of the arrears at a later date. Again, a side letter is the best means to achieve this.

The March quarter day has now passed and quarterly rents have, in most cases, become due. Some tenants have paid just a single month's rent rather than a full quarter's, to see whether this is accepted. If a landlord does accept one month's rent and does not forfeit the lease, it will waive its right to do so for the remaining two months' arrears. It will not lose the right to recover them as a debt (subject to the temporary measures proposed by the Government referred to above), simply the right to forfeit for them. This waiver will not apply to any future failure to pay rent.

A refusal by the tenant to pay elements of the service charge that are Covid-19 related

If a landlord of multi-let premises has incurred costs in connection with its response to Covid 19 which are outside its usual service charge expenditure, its tenants may try to argue that such costs are for the landlord to pay, or should be recovered under its insurance policies, rather than being passed on to tenants via the service charge.  Whether or not this is a good argument will depend on the drafting of the service charge provisions in a lease. Well drafted leases will include sufficient flexibility to allow recovery of costs incurred by a landlord in relation to compliance with statute, regulations, health and safety measures, safety and security and the wellbeing of tenants.

A tenant claim of breach of quiet enjoyment and derogation from grant

The tenant might argue that the landlord has breached the tenant's quiet enjoyment of the premises or derogated from grant (if, for instance, the landlord has shut the premises or closed common parts for deep cleaning) and that it is therefore entitled to compensation equivalent to all the rent and any other charges, plus other losses arising.  Such an argument is likely to be based on the idea that the landlord's acts have made the premises unfit or unsuitable for the purpose for which they were let. If premises are closed without a tenant's agreement, a tenant could succeed with this argument.

An argument by the tenant that the lease has come to an end as a result of forfeiture or frustration

If a landlord closes premises and prevents a tenant having access, that tenant could assert that the landlord has illegally forfeited the lease.  In this case it would be difficult for a landlord to maintain that it had not forfeited in order to enforce covenants including rent payment under a lease.  If the tenant wanted the lease to continue and applied to court for a declaration that forfeiture had occurred illegally, it would be likely to succeed and to be able to recover costs and damages.  If the landlord has notified the tenant of a proposed temporary closure and tried to discuss these arrangements, a claim by a tenant that this amounted to forfeiture is less likely to succeed.    

Alternatively, a tenant might argue that the lease has been frustrated because the tenant is not able to use the premises. This is unlikely to be a successful argument in court except if the remainder of the term is short and expires before the tenants are free to return to the premises.  In most cases a temporary inability to use premises will not amount to frustration of a lease.

Conclusion

While there are actions that landlords can take against tenants to enforce the rent payment terms of leases, it will usually be better for both parties if they can reach agreement with any tenants who seek concessions.  Any such agreements should be recorded in the form of side letters.

For more detailed information for landlords, click here, and for tenants, click here.

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