UPDATE: Below is an updated version of our briefing note dated 17 March 2020, which reflects the restrictions on the forfeiture of commercial leases and the enhanced restrictions on movement which were announced by the Government on 23 March.
Moratorium on landlord's right to forfeit leases
On 25 March 2020 the Coronavirus Act 2020 received Royal Assent. The Act is wide ranging and includes a temporary ban on forfeiture of commercial leases for non-payment of rent for just over three months (until 30 June 2020). The immediate practical consequences of this amendment are:-
- A landlord has no right, during the period ending 30 June, to forfeit a commercial lease for non-payment of rent; and
- In respect of pre-existing forfeiture proceedings for non-payment of rent, any possession orders granted during that period must not order possession to be given until after 30 June.
"Rent" includes all sums that the tenant is liable to pay to the landlord under the lease.
The legislation expressly states that the suspension of the landlord's rights over the three month period does not create any waiver of the landlord's right to forfeit for non-payment of the unpaid rent in future. The only circumstances in which a landlord will have waived its rights in this respect are where a waiver is given in writing.
There is no guidance on whether there are any restrictions on the right of forfeiture for the March quarter's rent being exercised immediately after 30 June and we should assume for the time being that it can be.
The Government has been clear in saying that landlords and tenants are expected to maintain an ongoing dialogue regarding payments due under leases, however, at present, in principle all the other usual remedies for non-payment of rent are presently available to landlords.
This includes using bailiffs to seize goods, statutory demands and winding up petitions), debt actions, claims against guarantors and calling on rent deposits. The type of action which is appropriate will vary from tenant to tenant and should be carefully considered based on legal advice to identify the best course of action in light of specific objectives and the risk profile of the proposed action.
However, practical difficulties in taking such action and pursuing claims may arise as it is not yet clear how Courts will approach any related claims brought during the moratorium or, taking into account their current capacity restrictions, when hearings are likely to be. By way of example, winding up petitions are not being heard until June 2020 at the earliest and we understand that any lease renewal claims within the First Tier Tribunal pilot scheme in London are also likely to be stayed for 3 months from now. We also anticipate that the Courts will be inclined to show leniency when exercising discretion, for example, in relation to giving judgment in debt claims for non-payment of rent or other sums or where injunctive relief is sought.
The Government has confirmed that it will provide a business rates holiday for the year 2020/21. This 100% relief applies to properties wholly or mainly used in the retail, leisure and hospitality sectors where the business is based in England. Properties which have closed as a result of the Pandemic will be eligible for the relief. Similar relief is available in respect of nursery businesses.
The Government has introduced two grant schemes. The first provides retail, leisure and hospitality businesses using property with a rateable value of under £51,000 with a grant of up to £25,000 per property. The second provides small businesses that pay little to no business rates a one off grant of £10,000.
You do not need to take any action to take advantage of any of the above forms of relief related to business rates. Your local authority will automatically apply the relief to your bill or write to you concerning eligibility for a grant.
Rent and other concessions should be formally documented to avoid rights being waived or other unintended consequences arising, such as the release of any guarantor.
Landlords and tenants should continue to review their insurance policies to identify potential cover for business interruption or loss of rent that might be responsive to the COVID-19 outbreak. The analysis of insurance coverage is policy specific and will need to be considered on a case by case basis.
Leases may define Insured Risk in such a way that makes it arguable that rent cesser provisions will come into effect where premises become unfit for occupation. This is usually (but not always) linked to physical damage to the premises or its means of access and will be dependent on whether a landlord's insurance is responsive to the relevant risk. The specific drafting of rent cesser provisions will need to be considered and tenants should consider asking their landlords for details of their insurance cover (many leases allow for this) so this can be reviewed.
Where landlords have, or potentially have, insurance cover, they should take steps to notify their insurer of potential claims before taking any steps to agree rent concession or other arrangements with tenants.
For more information on this topic, please refer to our briefing on insurance issues.
Frustration of leases
Absent specifically negotiated provisions, UK law is presently unlikely to recognise the COVID-19 outbreak as a frustration event. This advice may change depending on the duration of the current crisis and any further Government legislation that may be enacted. The key points to note are:
- The threshold for invoking the doctrine of frustration is very high and the burden of proof is on the party seeking to rely on the doctrine.
- UK courts have held that, in principle, a lease could be frustrated in very rare circumstances. There are currently no reported cases where a lease has actually been frustrated. The most recent (unsuccessful) case on frustration was the case between Canary Wharf and the European Medicines Agency in which the EMA argued that Brexit would frustrate its lease on the grounds of supervening illegality or frustration of common purpose because, as an EU institution it was unable to operate outside the EU. The Court held that there was no illegality or change in UK law that would have prevented EMA from performing its lease obligations including occupying the premises but the Court took account of fact that the lease was assignable and premises remained capable of occupation at all times. We cannot rule out the possibility that if the UK enacts specific legislation which makes the use or occupation of certain types of premises unlawful for a prolonged period this might be sufficient to frustrate a lease due to supervening illegality.
- A change of circumstances that simply makes performance of the contract less convenient or economically viable is very unlikely to amount to a frustration event.
Where frustration is not available despite premises being deemed unfit for use or occupation for a prolonged period due to the enactment of legislation it is possible that the Courts might alter their approach to the interpretation of leases and obligations to pay rent so as to balance the economic impact of a tenant's inability to use premises for the purpose for which they were demised.
Leases and Agreements for Lease should be reviewed for force majeure provisions. These are non-standard in modern UK leases and will not be implied. Such clauses where they do exist mostly relieve landlords of their obligations to provide services where it is not possible to do so. Force majeure provisions are more common in agreements for lease and these should be identified early and advice sought on the steps to be taken to preserve termination rights.
Please refer to our briefing on force majeure.
Practical guidance for COVID-19
Read the latest COVID-19 related updates on our hub.