The Coronavirus outbreak has resulted in a period of economic challenge for businesses, particularly those with commercial leases. Although the UK government is slowly easing lockdown restrictions by allowing non-essential businesses permission to open stores to customers on 15th June 2020, there are still many businesses such as offices, restaurants, bars and pubs that have still remained closed. In response to the Coronavirus pandemic in the UK, the UK government swiftly introduced the Coronavirus Act 2020 on 25 March 2020 to address tenants’ concerns of their contractual obligations under a commercial lease.
Before the Coronavirus Act, there were many options available to landlords when dealing with the issue of unpaid rent:
- Agree to a rent concession
- Withdraw rent arrears from security provided by the tenant such as, deposits
- Take action against the tenant’s guarantor if there is a guarantor in place
- Enforce commercial rent arrears recovery (CRAR) where the landlord takes control and sells the tenant’s assets to cover the rent arrears
- Take legal action in making the tenant bankrupt through insolvency proceedings
- Bring the lease to an end by forfeiture or agreeing with the tenant a surrender of the lease
However, the introduction of the Coronavirus Act has eroded these rights during the relevant period, to prevent landlords from taking legal action against tenants when dealing with unpaid rent.
How does the Coronavirus Act 2020 affect the obligations of tenants?
The Coronavirus Act 2020 has altered the tenant’s obligations under a commercial lease during the lockdown period, where they have the right to withhold payment of any rent due under the commercial lease. Under Section 82 of the Coronavirus Act 2020, there is a temporary moratorium in place to prevent tenant evictions on the grounds of non-payment of rent during the protected period of 25 March and 30 June 2020, and that the court cannot order a possession to take place before the end of the relevant period. Rent also includes service charges and insurance rent. This covers all tenants in occupation of a commercial lease for business purposes. The Act provides security to tenants under a commercial lease and safeguards their occupation during the pandemic where tenants would struggle meeting their rental obligations during the lockdown. The Government has the power to extend this period if necessary.
With the Act in place, landlords no longer have the statutory rights they would usually possess when dealing with unpaid rent. During the relevant period, landlords cannot evict tenants, forfeit the lease, or take any legal action for non-payment of rent.
However, this does not mean to say that the rent has been waived or payment of rent has been deferred. Tenants are still obliged to comply with the terms of the lease and pay rent. Landlords should carry on accepting rent payment and demanding rent when is it due. If a tenant cannot afford to pay rent then they will be protected by the Act. Upon the end of the moratorium, the landlord will be entitled to claim any unpaid rent, along with interest.
What rights do landlords have with the Coronavirus Act in place?
From a landlord’s perspective, the Coronavirus Act does not bode well for landlords as they may not be receiving any cash flow from the collection of rent. This is particularly worrying for landlords who are wholly dependent on rental income as their main source of income.
Nonetheless, landlords still have the right to evict tenants through enforcing non-monetary breaches of the lease. Tenants should still comply with all non-monetary obligations under a commercial lease to ensure that they are not in breach of the lease, and thus preventing the landlord the opportunity to enforce legal action to evict tenants.
Can I execute a Force Majeure Clause?
A ‘Force Majeure’ clause is a contractual term which relieves parties of their obligations under a contract if the obligations cannot be fulfilled due to an unexpected event creating a detrimental impact on performance. A tenant may have the right claim a reduction in rent if there is a force majeure clause in the lease. The ability to exercise the force majeure clause in the lease during the coronavirus pandemic would depend on the wording of the clause and whether the clause is applicable to events such as a pandemic. Furthermore, a force majeure can only be exercised if a supervening event has prevented, hindered or delayed performance, and that there were no reasonable steps to avoid or mitigate the supervening event or the consequences as a result of the event.
Does the tenant have a claim for a frustrated lease?
A frustrated lease is where there are supervening events which affect the both the tenants and landlords’ obligations, which can allow a lease to automatically come to an end. The coronavirus pandemic does classify as a supervening event, however, it is likely that the incapacity of a business premises during a temporary period would not meet the stringent test for frustration. However, the terms of the lease and the length of the lease, in correlation to the interruption period would need to be considered.
Steps for landlords and tenants to take
Landlords and the tenants will have their own plans on how to approach the situation and should liaise with each other in open discussions to find an amicable way forward.
Whilst landlord’s has no legal obligation to provide or agree to any rent reduction or rent holidays, it may be worthwhile for both the landlord and tenant to negotiate on the payment of any financial obligation under the commercial lease, to iron out any uncertainties and allow both landlords and tenants to be transparent about their plans or thoughts during the lockdown period to reach a voluntary agreement in the best interests of both parties.
