During these unprecedented times, where the situation is changing on a daily basis, we are aware that individuals and business owners will have many questions and uncertainties about how these developments impact on them.
Here, through a series of Q&A with expert lawyers from across our firm, Sintons hopes to be able to answer some of those pressing questions, and provide some certainty and clarity for people who are unsure how to proceed.
We will bring you a question and answer per day for the next few weeks.
In response to the global pandemic of COVID-19 the UK government introduced new extensive laws to help mitigate the virus’s impact on the country. The Coronavirus Act 2020 ( “the Act”) achieved royal assent on the 25 March 2020 and, in addition to providing the legal basis for the ongoing ‘lockdown’ of UK citizens, it sought to protect tenants of leases of commercial property who were struggling to pay rent by placing a temporary restriction on re-entry or forfeiture for non-payment of rent. As a result, landlords have been left in a difficult position with the Act affecting how they manage their buildings and their rental income.
Some of the potential questions that landlords may have in relation to dealing with commercial property in the current pandemic and under the Act are explored below, but we would advise that specific legal advice is sought before any action is taken.
Q – What options are available to me if my tenant is not paying their rent under the lease?
A –Under the Act landlords are unable to re-enter premises or forfeit leases due to non-payment of rent. The provisions were originally stated to only last for an initial period up to the 30 June 2020. However, the Act also allows that the government may extend this period. It is important to note that the Act does not suspend the landlord’s right to rent or other payments under the lease and therefore interest will begin to accrue on the rent that has not been paid.
One option therefore for landlords if their tenant is not paying rent is Commercial Rent Arrears Recovery (“CRAR”). CRAR is a process that allows for landlords to instruct an enforcement agent to take control of goods belonging to the tenant and to then sell these goods to cover the debt owed. However, there are some key points that a landlord must consider before pursuing this route. CRAR can only be used in relation to the principal rent under the lease and cannot be used to recover sums such as service charge and insurance rent, the Act also restricted landlords from using CRAR unless they are owed 90 days’ worth of rent and a landlord should consider from a commercial perspective whether the seizing of tenant’s goods to cover non-payment of rent is simply going to result in the tenant not being able to pay any further rent in the future.
Another option that will be available to some landlords is withdrawing sums from rent deposits received from tenants at the outset of the lease. Most rent deposit deeds will allow for the landlord to make withdrawals from the deposit in the event of the tenant being in breach of the lease (in this case non-payment of rent). Additionally, most rent deposit deeds will have provisions in them that require a tenant to top up the deposit following any withdrawal so this may well be a potential option to landlords who have rent deposits with their tenants.
Q – Do I have to provide ‘deep cleaning’ and additional services to comply with regulations? Can I recover the costs of these from my tenants?
This will depend on the terms of your lease. If the lease contains a landlord covenant to clean and keep safe the common parts of a building or property this may well be interpreted to cover deep cleaning of the property and complying with the new regulations imposed by the Act. Even if there is no such wording in the lease most landlords are now taking pragmatic steps in relation to more thorough cleansing of common areas and frequently touched surfaces. If you are a landlord of a building/centre where you employ managing agents you will also have to consider complying with your obligations under UK health and safety law which requires landlords to take all reasonable practicable action to ensure the health and safety of the people that they employ.
Implementing measures to combat the spread of COVID-19 will no doubt come at a cost to landlords. However, most leases including service charge provisions will contain clauses allowing for the landlord to recover costs spent in relation to good estate management. Additionally, leases are likely to include a clause stating that the landlord can recover costs incurred as required by statute so landlords should consider seeking to recover the costs incurred through the service charge.
Q – Do I have to entertain any requests from my tenant to vary their lease due to COVID-19?
Unless there is a specific provision in the lease the answer to this question is likely to be no. Landlords are facing difficult decisions regarding the long term benefits of supporting tenants while also considering the financial impact on their own business and also the obligations they may have to their lenders. Within the market, we are seeing landlords accommodating requests by tenants to pay monthly for a period instead of quarterly to assist cash flow. Also, tenants have been requesting rent deferrals and/or rent-free periods. Landlords need to carefully document such arrangements and be clear as to whether rent is deferred and still due. We can assist with the production of simple legally binding agreements to deal with such matters.
Q – Should I be including new wording in my leases to cover pandemics such as COVID-19?
Careful consideration must be given before any contractual provisions are agreed. We are seeing some wording put forward by tenant’s representatives that is very wide ranging and consequently unacceptable. The most likely scenario where wording will be needed is to cover circumstances where a party must complete an act by a set date. For example, an agreement for lease may contain obligations to complete works by a specified date. A well advised party should be seeking to include provisions that allow for time periods to be extended . We can advise on such provisions in the context of all types of agreements and lease.
If you would like further information on how landlords should respond on their commercial leases, please contact Alex Wilkins or a member of the Real Estate Team at Sintons.
