Covid-19 – Business Tenancies - more questions than answers?

27th March 2020 Commercial Litigation

From a commercial real estate point of view the Coronavirus Act 2020 throws up more questions than answers, which is perhaps not surprising given the speed with which it has been passed.

Section 82 of the Coronavirus Act is intended to prevent landlords from recovering possession of premises from tenants unable to pay their rent as a consequence of the government-imposed COVID-19 emergency lockdown.

In summary section 82 of the Coronavirus Act provides that:

  1. a right of re-entry or forfeiture
  2. under a relevant business tenancy
  3. for non-payment of rent
  4. may not be enforced during the “relevant period”.

Unpacking these in reverse order:

Firstly, the "relevant period" during which the provision is supposed to last expires on 30 June 2020 or such a later date as might subsequently be specified, depending on how the virus outbreak proceeds. Where there are existing proceedings then any order for possession cannot be made for a date before the end of the relevant period. Where there are existing proceedings and an order for possession has been made then it cannot take effect until after the end of the relevant period.

Secondly, "rent" includes any sums payable by a tenant to a landlord under the tenancy, including service charges and insurance rent. Any conduct by or on behalf of the landlord short of giving an express waiver in writing during the “relevant period” is to be disregarded as waiving the right of re-entry or forfeiture once that period has expired. A landlord may oppose business tenancy renewal under various grounds in The Landlord and Tenant Act 1954 ("the Act"), including for persistent delay in paying rent which has become due but any non-payment of rent during the relevant period (whether falling due before or during the relevant period) will be disregarded in assessing whether that ground is made out. In practice, where there has been persistent delay in paying rent the landlord will often already have taken steps to forfeit anyway and there will be nothing to stop this from occurring once the relevant period has expired. This provision only includes breaches under tenancies for non-payment of rent or other money due but not for any other breaches, even if those are related to the lockdown, such as a premises "keep-open" covenant.

Thirdly, the Coronavirus Act only applies to business tenancies and so will not apply to any other forms of occupation such as licences or tenancies at will (although forfeiture is unlikely to be relevant to these types of occupation). A "relevant business tenancy" is defined as a tenancy to which Part II of the Act applies or any tenancy to which that Part of that Act would apply if any relevant occupier was the tenant (defined quite vaguely as any "lawful" occupier of the premises or part of the premises comprised in the tenancy). However, it is unclear whether this is intended to include, for example, tenancies which have either been excluded by consent from the Act or are specifically excluded under section 43 of the Act anyway, such as tenancies granted for six months or less, employment service tenancies and agricultural holdings amongst others. Whilst it is likely that the government intended to include all premises occupied by tenants or those occupying lawfully premises used for the purposes of businesses, this is not the effect of the provision, at least in relation to tenancies specifically excluded as opposed to those contracted out. Also, it seems unfair and arbitrary that those contracted-out tenancies should not have the benefit of this provision, whereas those within the Act should have it. A definition by reference to use of the premises for a business per se would have been preferable. Our view is that contracted-out tenancies are included but excluded tenancies are not; whether this view will ever be tested by the court remains unknown.

Fourthly, the purpose of the provision is to prevent termination of tenancies during the relevant period by forfeiture or re-entry. It does not have the effect of preventing a landlord from recovering rent during the relevant period by other means, for example, by bringing court proceedings for a money judgment and enforcing it at any time. Alternatively, by pursuing an insolvency process such as serving a statutory demand or a bankruptcy petition or a winding up petition where appropriate. Given the context of the provision relates to "re-entry" to effect forfeiture, it is also unlikely to prevent a landlord from taking steps to enter (as opposed to re-enter) premises to recover rent using the Commercial Rent Arrears Recovery process (CRAR), although if a landlord is taking a commercial view and considers the tenant's business should otherwise be viable, it is less likely to seek to disrupt the relationship between them by taking such steps but would instead negotiate with the tenant as to payment of all rent arrears at an agreed point in the future.

Given that the legislation was brought in too late for the March quarter date, by when many tenants had already realised that they could not pay their rent, it remains to be seen whether and if so to what extent the legislation has the effect apparently desired by the government that being to prevent whole swathes of tenants going out of business due to the lockdown and the potentially massive knock-on effect to the UK economy. Arguably, and given that there will unlikely be many replacement tenants queuing up to take over premises during the lockdown, the approach and attitude of landlords will have a far greater impact on those businesses than this legislation.

See our note in relation to the impact of the unfolding COVID-19 crisis on business occupiers and landlords more generally.

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David Wadsworth is a Partner located in Londonin our Commercial Litigation department

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Scott Keown is a Partner located in Londonin our Real Estate Commercial department

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