COVID 19  –  Impact on Landlords and Tenants

We recently issued an update on the measures introduced as a result of the current situation see the article here.

The impact wreaked by Coronavirus has caused everyone to revaluate and consider situations that might not ever usually come to light!

The current situation has left landlords faced with requests for a relaxation of payment terms and tenants wondering what they can do if their cashflow is squeezed.

Some landlords and tenants will agree a new temporary arrangement informally, based on trust and on a ‘lets see how this goes’ basis.  But, that will not be possible or advised for the majority of situations where the impact and effect is much more significant.

We have already seen a spike in questions from both landlords and tenants, and although we cannot answer them all, we have set out a few below.

Question 1: I am a Tenant struggling to pay my rent:
If you are worried about paying your rent, you will need to check the provisions in the lease.

I missed my rent payment – what rights does my landlord have?
If you are worried about paying your rent, you will need to check the provisions in the lease.

In commercial leases where you have breached the covenant to pay the rent, your landlord will have the right to forfeit the lease and re-enter the property. This means that your landlord can take back possession of the property through peaceably re-entering the property or by obtaining a court order. The lease document is crucial as it will determine the exact rights that your landlord has in relation to forfeiture; in many cases a landlord can forfeit as soon as 14 days from a breach. Depending on how much rent is outstanding and whether there have been persistent breaches, you may or may not be able to apply to the court for relief from forfeiture.

A landlord can also withdraw money from any deposit it holds, pursue guarantors, serve a statutory demand or resort to Commercial Rent Arrears Recovery (CRAR).

What is CRAR?
Commercial Rent Arrears Recovery (CRAR) is a statutory procedure which allows landlords of commercial premises to recover rent arrears by taking control of the tenant’s goods and selling them.

In order to use CRAR, a landlord must provide 7 days notice of enforcement. Once this period has expired, Certificated Enforcement Agents may enter the property (through an open or unlocked door) in order to seize a tenant’s goods. CRAR applies whether or not reference is made to it in the lease. Landlords can still require sub-tenants to pay rent directly to clear any rent arrears, using a statutory procedure very similar to CRAR (but 14 days notice is required rather than 7).

My rent is up to date; however, I am concerned I will be unable to pay my rent in the near future

Renegotiate the rent:
Early dialogue with your landlord is essential.  With all of the uncertainty around coronavirus it is unlikely that the landlord could quickly find a new tenant and it could be very costly for them to lose you as a tenant. Your landlord risks not receiving any income whilst the property is empty for an indefinite period but also having to pay the rates on the property and incurring the cost of re-letting it.

There is a chance that the landlord may be willing to come to some kind of agreement with you in relation to your lease if you explain the impact that coronavirus is having on your business. This could be a reduction in your rent or ask for a rent-free period. Any agreement reached should be recorded in a deed of variation or side letter to the lease to avoid any future disputes.  Care must also be taken to negotiate and set out in detail future intentions regarding repayment of the missed rent and whether interest will be payable, for example.

Other options available could be to assign the lease to somebody else or surrender the lease back to your landlord.

Surrender the lease:
A surrender is a consensual agreement between you and your landlord. The landlord is under no obligation to agree to accept a surrender. A landlord may also require the payment of compensation (the payment of a surrender premium) in return to agreeing to you exiting your lease early.

Assign the lease:
You could also assign the lease to a party willing to take the lease from you. This will require the landlord’s permission and payment of their legal fees; and the landlord will need to approve the assignee.  However, this could be quite hard to achieve in present conditions.

Exercise your break right:
You could see if there is a break clause in your lease and to end your lease in accordance with that break right. It is essential that any break notice is validly served to ensure that the break right is properly exercised and not lost.

Question 2: I am a Landlord and my Tenant is struggling to pay its rent
You could negotiate a rent freeze, rent suspension or temporary rent reduction with your tenant rather than contemplating a surrender or forfeiture for non-payment or using CRAR.

If you do so you must ensure that the terms of any  deferment or reduction made clear and that your conduct or agreement does not  amount to or could be construed as constituting any form of waiver of the right to be paid the rent.

Depending on the circumstances and what has been agreed with your tenant you may also want to make sure that there is no suggestion that you have agreed to vary the lease permanently to reduce the rent or change the payment terms, or say anything that prevents you from claiming the full rent once the temporary arrangements have ended and/or which could have a prejudicial effect on any future rent review or future lease renewal.

As part of any negotiations you must consider and agree what is to happen with the balance at some point and whether it is to be payable and what the payment terms will be, including any interest.

Question 3: The undertenant
The position may not be so straight forward where you are an undertenant and it is your immediate landlord that is having difficulties.  Where does this put you as the undertenant?

What would happen to my underlease upon the termination of my landlord’s head lease?
A surrender is a consensual termination and the immediate landlord’s interest as tenant in the property comprised in the head lease is deemed to pass to the head landlord, subject to your rights as undertenant.

I think my immediate landlord might have a tenant break right in its head lease. What happens if the immediate landlord exercises the break right?
Regrettably if either the head landlord or your immediate landlord has a break right in the head lease, then your underlease will terminate if either the head landlord or immediate landlord exercises its break right.

Hopefully, this would be an academic point as your lease should include provisions ensuring that the term of your underlease should expire before the break date in any immediate head lease.

If the underlease term is for a term which goes beyond the immediate landlord’s break date and either the head landlord or your immediate landlord exercises the break right in the head lease then you might be able to action against the immediate landlord for breach of covenant to give you quiet enjoyment of your premises.

What is quiet enjoyment?
Very broadly speaking, it is freedom from disturbance. The immediate landlord should not do anything to adversely disturb your underlease. If it exercises a break right and this results in your underlease terminating, then that is a disturbance of your underlease and your right to quiet enjoyment.

What if my underlease has the protection of the Landlord and Tenant Act 1954?
Your underlease will continue and the head landlord will become your landlord.

What about on a surrender and re-grant, for example if the immediate landlord were to surrender its lease and sign a new lease for the same premises or with an extension to the term of the existing lease and took on additional space from the head landlord?
As undertenant you will still have the same rights against your immediate landlord; and your immediate landlord will still have the same rights against you as before as if the original head lease had not been surrendered. So, it is business as usual between you and your immediate landlord.

What if the immediate landlord has breached its lease and the landlord forfeits the head lease?
If the head lease is forfeited, your underlease will be terminated. However, all might not be lost. You have the right to apply to the court for relief from forfeiture, and in the event that you are successful (and there are no guarantees here) the head lease and underlease may be reinstated or a new lease is granted by the head landlord at the direction of the court in granting relief from forfeiture.

Conclusion
Getting legal advice as early as possible will serve you well and there are many pitfalls of trying to deal with matters without getting proper advice and inadvertently finding yourself in a worse position.  It is important to see matters from your landlord’s or your tenant’s perspective: it is an uncertain time for them too.  They may well be happy to be flexible and allow for you to negotiate with them.