Business tenancies

Tenants of business premises benefit from the following protections at the current time:

  • Restrictions on forfeiture of business premises
  • Lease renewal - opposition on rent ground
  • Restrictions on Commercial Rent Arrears Recovery (CRAR)
  • Restrictions on winding up of companies and a new company moratorium.

The government has also published a Code of Practice, which is dealt with below.

 

Protection from forfeiture

Section 82 of the Coronvirus Act 2020

Section 82 of the Coronvirus Act is designed to protect business tenancies from forfeiture during the current crisis. It works in two ways:

  • It places an immediate prohibition on enforcing rights of re-entry for rent arrears;
  • For existing proceedings, it pushes back the earliest date that any possession order may take effect in England to 30 June 2021 (originally 30 June 2020 - then extended on a number of occasions).

Right of re-entry - rent

Section 82 specifies a “Relevant Period.” The period originally ran to 30 June, then 30 September, then 31 December but has now been extended in England to 30 June 2021 (by regulation under s82(12)) in EnglandWales). During this period, any right of re-entry or forfeiture under a relevant business tenancy for non-payment of rent may not be enforced by action or otherwise. 

Section 82(1):

  "A right of re-entry or forfeiture, under a relevant business tenancy for non-payment of rent many not be enforced, by action or otherwise, during the relevant period."

relevant business tenancy is “a tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies”, or “a tenancy to which that Part of that Act would apply if any relevant occupier were the tenant.” A relevant occupier is “a person, other than the tenant, who lawfully occupies premises which are, or form part of, the property comprised in the tenancy; as a lawful occupier of part or all of the premises concerned.” (s82(12)).  This extends the protection to lawful sub-tenants and licensees who is in the property for the purposes of a business.

A “contracted-out tenancy” is still a tenancy to which Part II of the 1954 Act applies (s23, 38 and 38A of the 1954 Act).

The section prevents any right of re-entry or forfeiture and so obviously applies both to actual re-entry and forfeiture proceedings.

The definition of “rent” is wide. It includes “any sum a tenant is liable to pay under a relevant business tenancy”, so that would include service charges, insurance rent, costs … anything.

Due to the differences between common law rent arrears possession proceedings in the High Court and proceedings in the County Court pursuant to section 138 of the County Courts Act 1984, the Act makes slightly different provision for both.

High Court

In the High Court, any new order requiring the tenant to give up possession of premises made during the Relevant Period must ensure that possession does not have to be given up before the end of the relevant period. (s82(3)(4)).

Where an existing order requires the tenant to give up possession during the relevant period, upon the application of the tenant to vary that order (before possession is given up), the Court must ensure that the tenant does not have to give up possession before the end of the Relevant Period. (s84(3)(5)(6)).

County court

In the County Court, no new order may be made under section 138(3) (i.e. specifying a period for repayment of arrears and costs or the giving up of possession) that expires before the end of the Relevant Period. (s82(8)).

For any existing order under section 138(3), where the period specified for either payment or giving up possession under section 138(3) falls on or before 30 June 2020, the period given in that order is deemed to be extended until the end of the Relevant Period. (s82(9)(10)).

Waiver of forfeiture

Subsection 82(2) seeks to avoid the risk of a landlord of business premises inadvertently waiving its right to forfeit during the Relevant Period. It thus provides that no waiver of forfeiture is effective during the Relevant Period unless express and given in writing.

S.82(2): “During the relevant period, no conduct by or on behalf of a landlord, other than giving an express waiver in writing, is to be regarded as waiving a right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent.”

This should allow a landlord to continue to demand and accept rent during the Relevant Period, without prejudice to their rights to forfeit for any arrears that remain outstanding at the end of the relevant period (including, it would seem, for arrears of rent that fell due before the end of the relevant period).

Comment

These provisions are only temporary and limited. They do not prevent the rent liability from accruing and do not prevent the landlord from seeking to exercise any other remedy such as serving a statutory demand (but see further below) or bringing a rent claim.

The Government has also published a voluntary Code of Practice which it hopes will "help commercial landlords and tenants map out plans for economic recovery during the coronavirus pandemic."  The Code "encourages tenants to continue to pay their rent in full if they are in a position to do so and advises that others should pay what they can, whilst acknowledging that landlords should provide support to businesses if they too are able to do so."  See further below.

Once the crisis is over landlords will have their remedy of forfeiture back but how many of them will want to exercise it against a tenant who wants to remain in possession if there are no other business out there willing to take on property?

It will also be interesting to see whether or not the requirement for a waiver to be express and in writing is retained or re-incorporated into the law after the Coronavirus crisis ends. It would be a neat way of dealing with many of the complexities relating to waiver.

 

Lease renewal

Section 82 of the Act also makes provision in relation to applications for termination of renewal of business tenancies under Part II of the Landlord and Tenant Act 1954.

For the purposes of determining whether or not a landlord has made out the ground mentioned in s30(1)(b) of the 1954 Act (persistent delay in paying rent) “any failure to pay rent under that tenancy during the relevant period (whether rent due before or in that period) is to be disregarded” (s82(1) of the 2020 Act).

 

Commercial Rent Arrears Recovery

Commercial Rent Arrears Recovery (CRAR) came into force on 6 April 2014, under the Tribunals, Courts and Enforcement Act 2007 (the “2007 Act”). It enables the landlord’s enforcement agent to enter the premises and to remove and sell a tenant’s goods to pay a rental debt due from the tenant to the landlord.

The procedure for using the remedy is set out in Schedule 12 of the Act, entitled “Taking Control of Goods”, CPR84, and Part 7 of the Taking Control of Goods Regulations 2013 (the "2013 Regulations"). CRAR is:

  • Only for purely commercial premises let under any written lease (unless residential use is in breach of the terms of the lease);
  • Only where a minimum 7 days’ worth of ‘principal’ rent is due (such rent may include interest and VAT but must be exclusive of insurance or service charge rents) – and that amount must be clear of any set-off;
  • Only where a minimum of 7 days written notice has been given beforehand to the tenant

The regulations set out the details of the information to be contained in the written notice and the method of service. If rent remains unpaid after service of written notice, the landlord can instruct an enforcement agent to recover the arrears by seizing control of the tenant’s goods and selling them at auction.

However, the requirement for 7-days rent to be outstanding was increased

  • To 90 days on 25 April 2020, under the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020;
  • To 189 days on 24 June 2020, under the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (No. 2) (Coronavirus) Regulations 2020
  • To 276 days on 29 September 2020, under the Taking Control of Goods (Amendment) (Coronavirus) Regulations 2020 and will increase to 366 days on 25 December 2020

Sub-tenants

Where a tenant has failed to pay rent, it is open to a landlord to serve notice under s81 of the Tribunals, Courts and Enforcement 2007 on a sub-tenant, requiring the sub-tenant to pay the sub-rent direct to the head landlord bypassing the immediate tenant (the sub-tenant’s direct landlord) until such time as the arrears have been met.

 

However, section 81(1) of the 2007 Act specifically states that this remedy only “applies where CRAR is exercisable by a landlord to recover rent due and payable from a tenant (the immediate tenant)”. One consequential effect of the change in CRAR to 276 days unpaid rent under the Taking Control of Goods (Amendment) (Coronavirus) Regulations 2020, is that a landlord will not be entitled to require that an undertenant pays rent directly to the landlord (rather than the intermediate tenant) unless 276 days’ rent is overdue (366 days from 25 December).

 

Company insolvency

The Corporate Insolvency and Governance Act was enacted on 25 June 2020, when almost all its provisions commenced, save that most of the temporary business protection measures it enacts have retrospective effect from 1 March 2020.

There are two main areas which impact landlord and tenant law: the restrictions on the use of winding-up petitions and the new moratorium.

Corporate Insolvency and Governance Act 2020 (Coronavirus)(Extension of the Relevant Period) Regulations 2020.

The original 30 September 2020 date (referre to below) was extended to 31 December 2020.

The government has also produced an Explanatory Memorandum

 

Winding up

Corporate Insolvency and Governance Act 2020, Schedule 10

Many landlords have used statutory demands, and the implicit ‘threat’ of a consequent winding-up petition to obtain lease payments from defaulting tenants. The use of the insolvency process in this way is severely curtailed by Schedule 10 of the 2020 Act.

The Act contains provisions protecting debtor companies until 31 December 2020 (previously 30 September).  

  • It is not possible to present a winding up petition on the ground that a company has failed to satisfy a statutory demand, if the relevant statutory demand was served during the period beginning on 1 March 2020 and ending on 31 December 2020 (previously 30 September). (Para 1).
  • Nor it is permissible to present a winding up petition on the basis that a company cannot pay its debts on any of the other usual grounds (or a statutory demand served before 1 March) until 31 December 2020 (previously 30 September 2020) unless the creditor has "reasonable grounds for believing that—(a) coronavirus has not had a financial effect on the company, or (b) the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company". (Para 2).

Both provisions are back-dated to petitions presented since 27 April. (Para 1(4) in relation to the first restriction; Para 21(1) in relation to the second).

Note that there is no "reasonable grounds" exception in relation to petitions based on statutory demands served between 1 March and 30 September.

Coronavirus has a “financial effect” on a company if the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus. Satisfying this condition may well prove very difficult for many creditors. (Para 21(3)).

There is plenty of scope for dispute on whether or not the debtor has been financially affected by coronavirus and such a dispute could in itself lead to a complicated hearing with potentially expert and witness evidence being adduced. The listing of such a hearing may well be outside the relevant period.

The Act also provides that where any winding-up petition was presented after 27 April 2020 but before the Act came into force, the court has the discretion to, in effect, dismiss the petition (with costs) unless it considers the exceptions mentioned above would apply. There are also other consequential procedural provisions that will need to be looked at.

In addition, Schedule 10 provides that a court may make a winding up order where the petition is presented in the relevant period on a ground specified in the Insolvency Act 1986 “only if the court is satisfied that the facts by reference to which that ground applies would have arisen even if coronavirus had not had a financial effect on the company” (Para 5). In addition, if the winding-up order was made before the Act came into force it will be void if it does not meet this requirement (para 7).

 

Company moratorium

Section 1 of the 2020 Act

Section 1 of the 2020 Act introduces a new company moratorium by inserting a new Part A1 at the start of the Insolvency Act 1986, with the eligibility criteria to be set out in a new Schedule ZA1 to the 1986 Act.

This new moratorium is a free-standing moratorium of an initial 20 business days (extendable in certain circumstances) for struggling businesses which are capable of being rescued as a going concern. The moratorium will allow directors to remain in control of the business while being overseen by an independent monitor.

In order to qualify:

  • The directors must state that in their view the company is, or is likely to become, unable to pay its debts (there is no guidance on how the directors should assess this);
  • The insolvency practitioner acting as proposed monitor must be willing to certify that in his/her view it is likely that a moratorium would result in the company being rescued as a going concern;
  • The company must not have been subject to a moratorium, CVA company or administration in the previous 12 months, or currently in any type of insolvency process – though this condition is relaxed for moratoria sought in the first month after the Act came into force.

Subject to satisfying the eligibility criteria, the moratorium provides a payment holiday for certain types of pre-moratorium debts as well as those incurred during the moratorium.

Importantly for landlords, rent due in respect of the moratorium period does not benefit from a payment holiday and the company will have to be able to pay the rent during the moratorium period.

As directors have to confirm that the company’s debts (that are not subject to the payment holiday) have been paid before they can apply to extend the moratorium, and the monitor has to bring the moratorium to an end if it thinks the company is unable to pay its debts, this should provide comfort to a landlord in respect of payment of rent. To the extent that the moratorium fails and the relevant debts, including rent, are not paid as they should be, they have priority status in any administration or liquidation (commenced within the relevant time period).

However, the moratorium does prohibit, at section A21, the following actions without consent of the court:

  • Forfeiture (by court proceedings or peaceable re-entry)
  • Enforcing any security over the company’s property
  • Any legal process (including legal proceedings, execution and CRAR)
  • Commencing insolvency proceedings

and therefore, limit a landlord’s options for recovering historic unpaid rent arrears.

 

Code of Practice

Code of Practice for commercial property relationships during the COVID-19 pandemic

This new voluntary Code of Practice is relevant to all commercial leases held by businesses, in any sector, which have been impacted by the coronavirus pandemic. Its aim is to provide a “transition back to normality” and in so doing provide clarity for businesses when discussing rental payments and to encourage best practice so that all parties are supported.

The Code highlights the importance of landlords and tenants working together collaboratively to reduce the impact of COVID-19. It encourages tenants to continue to pay their rent in full if they are in a position to do so and advises that others should pay what they can, whilst acknowledging that landlords should provide support to businesses if they too are able to do so.

The Code, developed and coordinated by the UK government with leaders from the retail, hospitality, and property sectors, was published on 19 June 2020.

The key principles of the code are:

  • Transparency & collaboration
  • A unified approach
  • Acting reasonably and responsibly

The Code deals with both rent and service charge and insurance.

Rent

The Code makes it clear that “Tenants who are in a position to pay in full should do so. Tenants who are unable to pay in full should seek agreement with their landlord to pay what they can taking into account the principles of this code.”

It stresses that in seeking an arrangement and any changes to rental payments, both parties should act in good faith, reasonably and flexibly:

  • Tenants who require concessions must be clear with landlords as to why they are needed and must provide relevant financial information to back up this request.
  • Landlords should provide concessions where they reasonably can, taking into account their own duties and commitments. If a landlord cannot agree a concession then it must provide a reasonable explanation.

The Code then sets out a useful non-exhaustive list of points for landlords to consider when reviewing a tenants request for a rent concession, which includes:

  • Considering the impact of coronavirus on the tenant’s business – e.g. closure periods, social distancing (and associated costs), government support.
  • The tenant’s previous track record under its lease terms and any concessions to the tenant already agreed.
  • The impact that providing support may have on the tenant’s competitors and on other support already offered to tenants.

There is also a non-exhaustive list of potential options, which could be agreed between landlords and tenants, including (and possibly in return for other arrangements e.g. removal of break right, extension of term etc.):

  • Rent free periods, rental deferrals, rent reductions, monthly rents
  • Turnover rents or other rental variations
  • Waiver of default interest, no deposit ‘top up’

Service Charge and insurance

The Code recommends that service charge and insurance costs continue to be paid by tenants in full. Buildings still need to be insured and maintained, but landlords should consider e.g.

  • Service costs to be reduced where the lack of use of a property has lowered the service charge costs incurred.
  • Additional service costs may be required, e.g. in order to operate a building which complies with health and safety requirements in the context of COVID-19, or re-commissioning where buildings are reopened.
  • Where possible, the frequency of tenant service charge payments should be spread over shorter periods.
  • Management fees to reflect the actual work carried out in managing the services and the service charge during the COVID-19 crisis.
  • Any agreement reached take account of the RICS Professional Statement Service Charges in Commercial Property, 1st edition, and of all RICS guidance in relation to service charges and COVID-19

Comment

This website is about law and so perhaps we might be cynical about codes; but in reality is this code really likely to make an difference? Are landlords and tenants going to sit down and read the code when deciding how further to proceed? Surely, they are simply going to look to their own interests in the light of the legal protection or otherwise that is available?

 

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