Typically, commercial leases will include forfeiture provisions within them. These enable landlords to re-enter the commercial premises due to insolvency or a breach in contract throughout any time during the tenancy.
With an ability to forfeit the lease within either 2 or 3 weeks after a failure to pay, it was something that many commercial tenants feared when their finances started to take a turn. However, due to the recent pandemic, these worries were heightened. Which is where a new piece of legislation came into play.
Easing The Financial Burden for Commercial Tenants
Due to the rapid rate at which the Coronavirus is evolving and the impact of it on businesses, the government has recently announced new legislation (known as The Coronavirus Act 2020) that will help to protect commercial tenants.
Under the legislation, those that are now unable to pay their rent due to the impact of the pandemic will have protection from forfeiture of their commercial leases until the 30th June 2020 at the earliest.
Before this legislation was utilised by commercial tenants, it originally only covered those in residential rental properties. But due to the outbreak, the moratorium was extended to allow for more flexibility regarding payments and open discussions between landlords and tenants.
Although it was initially thought of as a way to only cover tenants if they can’t pay for rent due to COVID-19, tenants of commercial buildings don’t need to necessarily state that this is the sole factor of non-payment – an interesting factor that helps to ease the overall financial pressure.
The Coronavirus outbreak undeniably put a huge financial burden on many businesses – and especially those who have commercial spaces that they have to pay expensive rent on each month or those who are operating at a smaller capacity.
That’s because not only were many forced to close their doors until further notice, but because of the ongoing lockdown procedures and social distancing measures that have been ordered by the government. Which is why this new legislation is welcomed with open hands by many businesses across the UK in a range of industries.
Taking the financial burden away from the tenants in the short term, it allows them to save some money and rethink their finances so that they can adjust to the uncertainty of life after lockdown. This is particularly useful for businesses that only have a commercial premise and don’t operate online – as all of their monthly income would be coming from sales within their shop alone.
Which Businesses are Covered Under The Legislation?
However, there are certain tenancies that are excluded under this new legislation; only applying to a “relevant business tenancy” that fall within Part 2 of the Landlord and Tenant Act 1954 that should be taken into consideration before expecting to benefit from the act.
Without doing so, businesses will plan to be included, leading to huge unpredicted financial losses that put the future of their business under risk.
The following types of tenancy, for example, aren’t covered under the legislation:
- Businesses that have been leasing a commercial premises for 6 months or less (except where the lease term exceeded 12 months or included the right to renew after 6).
- Tenants within agricultural holdings.
- Employment service tenancies.
- Those working from home full-time.
- Tenancies at will
Although there are limitations and exclusions within the act, it’s also important to recognise that the forfeiture moratorium on rent will extend not only to the annual rent that tenants pay for commercial spaces, but also includes any sum which they are liable to pay under their business tenancy – including any interest, service charges or business insurance; something that many commercial tenants may not realise.
Despite this, commercial tenants will have to keep in mind that the provision is only a delay on the action and it will not directly affect the landlord’s right to recover rent in full or claim for forfeiture provisions after June (if the moratorium has been lifted by then, of course).
Unfortunately, regardless of the legislation, the use of the Company Voluntary Arrangement (CVA) process has risen. Used by many businesses (and in particular, retailers) to reduce lease liabilities throughout this time, it showcases the potential of a new wave of CVAs in the future across various commercial businesses once the protective measures end.
The Impact on Commercial Landlords
As Coronavirus develops and the situation continues to be monitored by the government, the act takes into account both the impact of the delay on each commercial landlords’ cash flow and the tenant’s ability to repay the rent during this time.
Because of this, in spite of the benefits for commercial tenants, the act is bound to have negative repercussions for commercial landlords across the country.
Now facing the possibility of three months (or more) of potentially no to little income from rental properties, it’s bound to be an uncertain time for them as the situation develops – especially for those with multiple properties or those with premises within areas that have high rental prices, such as in the capital.
Although there is currently an end date on the rent-relief, as it’s kept under review by the government, the pressure on landlords is ever-increasing.
While many residential landlords were given a three-month mortgage holiday to help with the costs, those that operate within buy-to-let were not offered the same allowances. With outgoings remaining the same, the position that they have been put in is unfavourable, to say the least.
Despite the moratorium directly aligning with closures under government guidance, landlords and tenants are still being encouraged to discuss the ways in which they will structure rental payments. This is to allow for transparency between the two parties and a mutual understanding of what will happen regarding rental payments throughout the next three months, when the lockdown has been lifted throughout the UK and when June 30th has passed.
There are, however, loopholes when it comes to certain businesses – in particular, leisure centres and gyms.
Despite the act coming into play, these types of businesses are at risk of being evicted from their commercial spaces during this time as it does not prevent landlords from taking certain actions, including making a debt claim, issuing a statutory demand, seeking Commercial Rent Arrears Recovery (CRAR) or winding-up proceedings.
One business, in particular, that felt the wrath of these loopholes is David Lloyd Leisure, whose requests to waive rental payments from March were outright refused. The landlord proceeded to issue a statutory notice and further legal action if they did not cover the payments asap.
To summarise, it’s undeniable that the act was set up by the government to prevent the majority of commercial tenants from losing their premises as a result of the pandemic. The importance of such businesses within the economy is undeniable, and therefore whatever can be done to prevent them from going under is one of the top priorities of the government.
Even after the virus starts to dissipate, commercial businesses will continue to face huge financial difficulties – that’s a fact that businesses will have to deal with. Whether this is in the form of continually struggling to pay rent or making the tough decision to close their doors for good, it’s unclear what the future has in store and will depend on the business in question.
And whilst in the present the forfeiture moratorium is undoubtedly convenient for them, the recovery process post-outbreak will need to be decided upon to help to support those businesses that have suffered from it.
However, as it only will suspend the forfeiture for three months to start with, each commercial tenant’s fears will potentially remain the same.
It’s also on a case-by-case basis and will depend on the flexibility of the landlord. If a business has a particularly strict or demanding landlord, then they may enforce a harsh repayment plan in order to reacquire the rental payments that they have missed over the past three months.
Weighing up their own commercial position against their tenants, they will approach the situation as they deem fit – as long as they have the legal standing to do so, of course. This risk will undeniably worry tenants, as they will have to have the payments in hand, in case of any harsh decisions made by their landlord.
Therefore, if you run a commercial business, no matter what it is or where it’s located, it’s important to remain in-the-know of what the government is doing to help you throughout this time, as well as any actions that they are taking to assist you once the lockdown comes to an end.
It’s also essential to stay in contact regularly with your landlord to ensure that you’re both aware of the procedures. A time when there must be clarity surrounding the forfeiture of commercial leases, it’s important to not sit back and presume that the moratorium is a ‘rent-free holiday’ with no future repercussions for your business.
Also published on Medium.