Can tenants walk away from their leases?
Shops, restaurants, bars and theatres have all closed their doors in the past week. If a lease is mid-term with no break provision, the closure of the premises due the public health restrictions will not bring the lease to an end. Leases rarely have force majeure clauses and it is still thought extremely unlikely that the doctrine of frustration will apply. As such, rent continues to fall due and tenants should open dialogue with their landlords if they want to negotiate a surrender.
Non-payment of rent and suspension of the right to forfeit
As the March quarter day (25 March) loomed ominously and swiftly in the face of business closures due to Covid-19, causing concern amongst commercial landlords and tenants about tenants’ ability to pay the March quarter, the Government responded with a proposed commercial forfeiture moratorium in the form of The Coronavirus Bill, which received Royal Assent last night and is now The Coronavirus Act 2020 (the Act). Under the Act:
- The commercial forfeiture moratorium prevents a landlord, during the relevant period, from enforcing the right of forfeiture for unpaid rent (or any other sums due under the lease). It is likely that the moratorium will apply to arrears already due and not just the March quarter.
- The relevant period is currently through to 30 June 2020 (although this can be extended) which means a commercial tenant cannot be evicted (for non-payment of rent or any other monies due under the lease) before 30 June 2020.
- Landlords can only waive their right to forfeit by explicitly doing so in writing. No doubt this is to encourage open dialogue between landlords and tenants to discuss these issues and reach amicable arrangements for settling arrears.
- Although the moratorium removes the ability to forfeit the lease during the relevant period, it does not prevent the landlord from pursuing other remedies for non-payment of rent such as: Commercial Rent Arrears Recovery (CRAR), enforcing a guarantee, an AGA, drawing down from a rent deposit, serving the tenant with a statutory demand (which is the first step in bankruptcy/winding up proceedings) or issuing court proceedings for the arrears.
- A tenant should therefore avoid simply not paying the rent as the tenant then has no control over what enforcement action the landlord might take and, if the landlord does nothing, the rental liability will just keep increasing. The tenant should try to engage with its landlord to try to agree a finite concession of the payment of rent, recording the agreement in writing, with the terms of any concession being clear.
- Clearly landlords do not have to agree to any compromise, and many will have their own cash-flow and asset value to preserve (as well as, importantly, payments and other obligations to their own lenders, who may need to consent to any rent concessions the landlord may give) but the emergency legislation has been designed to provide a breathing space for businesses, encouraging and enabling landlords and tenants to work together to find a workable solution to carry them positively through the immediate situation and to ensure the country can get back up and running quickly once the restrictions are lifted.
Moving out
- Juxtaposed against the commercial forfeiture moratorium, is the difficult position of the tenant who is seeking to vacate premises either according to the expiry of their lease or expiry of a notice to terminate the lease, which may have been served several months ago.
- In preparing to strip out premises to hand them back according to the repair and condition required by the lease, what if the tenant’s shop fitting/stripping out company is unable, in these exceptional circumstances, to meet the demand and strip out the premises in time for the end of the lease term or expiry of the notice?
- Will the landlord argue a failure to give vacant possession and seek rent, potentially a penalty rent? Will the landlord’s claim for terminal dilapidations be increased by virtue of the tenant’s failure, or rather, inability due to extenuating circumstances, to remove its fixtures and fittings and strip the premises to shell state?
- In the worst case, if break conditions remain unsatisfied at the break date, the result could be that an unwanted tenancy runs for several more years.
- In the face of these potential consequences, what can the tenant do? As well as ceasing trading and handing back the keys to the landlord, the tenant might try to agree a licence for its contractors to have access to the premises to carry out the strip out works after the premises have been handed back to the landlord. Any fees charged for the access period should be balanced against the estimated potential increase in the terminal dilapidations claim for the purposes of assessing its viability. This is an unusual proposal but these are unusual times.
- The impact of the tenant’s ability to give vacant possession and hand back the premises in a required state, will be significantly more acute in relation to the ability to meet break conditions and each lease will need to be reviewed carefully to consider the best approach to the landlord, which should be done as early as possible.
Residential tenancies
The government is also stepping in to protect residential tenants through the Act as follows:
- All notices to quit and notices seeking possession which are served under the Protection from Eviction Act 1977, Housing Act 1985 and Housing Act 1988 must, from today, (being the day after the Act was passed) give three months’ notice. The provisions will also apply to Notices for Anti-Social Behaviour.
- The changes will apply to the following types of tenancies in the social and private sectors: Rent Act/protected tenancies, Secure tenancies, Assured tenancies, Assured Shorthold tenancies, Flexible tenancies, Demoted and Introductory tenancies.
- The changes will not apply to: Rent Act 1976 tenancies, Assured Agricultural tenancies, Family Intervention tenancies, Licences, Contractual tenancies, Guardian agreements, temporary homeless accommodation and many employment related tenancies.
- There will also be a three month ban on issuing possession proceedings although it is presently unclear whether the ban will relate to all possession proceedings or just those brought on the basis of rent arrears. It is also not yet clear how the changes will affect existing possession claims and we will update on the position once further information is available.
- The Act provides for a possible extension on the initial three month period, depending on how soon the situation improves, but it is does not set out how any extension would affect notices served according to the three month requirement.
- There will also be a three-month mortgage holiday for Buy to Let mortgages.
For more information please contact a member of our team.
