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Monday, 6 April 2020

COVID-19: Coronavirus Act & Moratorium on Forfeiture of Business Leases


The government has now legislated for a temporary moratorium on forfeiture of commercial leases in Section 82 of the Coronavirus Act 2020.

Section 82 (1) provides that a right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period, which runs until at least 30 June 2020.

Section 82 allows for the possibility that this period may be extended, perhaps several times, and provides that extensions can be made by statutory instrument.

Now this has become law, here are some points to bear in mind on how the moratorium will affect commercial tenants and their landlords.

·       The Coronavirus Act 2020 received Royal Assent on 25 March 2020, and the moratorium will therefore relate to both the March and June quarter days (25 March and 24 June), for tenants who pay their rents quarterly.

·       As we are now several days into the March quarter, and many tenants will pay their quarterly rent by standing order, the decision on whether or not to pay the March quarter’s rent will already have been made by many tenants, and they didn’t have long to make up their minds between the announcement of the policy and the quarter day happening. Others may now technically be in arrears and still deciding what to do.

·       Many tenants instead pay their rent monthly, in which case the moratorium will apply to each payment as it falls due during the moratorium period. Depending on their circumstances, those tenants may decide to withhold some or all those monthly payments.

·       Rent is widely defined by Section 82(12) to include “any sum a tenant is liable to pay under a relevant business tenancy”, and so will include insurance contributions, service charge, interest and any other payments falling due under the lease. This could also include amounts payable to a landlord because of breaching the repairing covenant (so-called Jervis v Harris payments), and any landlord’s costs for which the tenant is liable.

·       The moratorium applies to all commercial tenants, not just those who can’t pay their rent because of coronavirus. The Act doesn’t state that the arrears must have arisen as a result of the current crisis, so a tenant who is in arrears for any reason benefits from the moratorium.

·       The moratorium applies to all commercial properties, not just retail or hospitality.

·       A tenant who has the means to pay its rent should however think very carefully before trying to take advantage of this provision.

·       This is not a rent holiday. It only suspends the right of re-entry or forfeiture for non-payment of rent. Landlords are still owed the rent and other payments at the end of the moratorium period, and will be able to bring forfeiture proceedings then if the rent  and other sums remain unpaid, even if they have not sought collection at all during the moratorium period.

·       Even during the moratorium period, a landlord will be entitled to add interest to the rent in accordance with the relevant provisions in the lease, and so that amount ultimately payable will be increased, typically by a daily rate equivalent to 4% per annum above base rate (depending on what the lease says).

·       Despite the moratorium, a landlord will still be able to take payment for itself from a rent deposit, if there is one; exercise Commercial Rent Arrears Recovery (if it can practically do so during the stay-at-home period); sue the tenant and/or any guarantor for the debt; and serve a statutory demand and bring into play the relevant insolvency procedure.

·       Nevertheless, the government is trying to encourage co-operation between landlords and tenants, and it may prove to be counter-productive for a landlord to adopt a more adversarial approach, and there may be practical difficulties in doing so.

·       How a landlord approaches this may depend on its own financial position, and the attitude of any lender, and a landlord is unlikely to look favourably on a tenant who may be trying to game the situation rather than one who is genuinely in need.

·       The position is potentially more complicated where the landlord is itself a tenant under a head lease, as it too will be protected by the moratorium.

·       If a tenant has a break clause that can be operated during the moratorium period or a potential extension to that period, it will need, as always, to examine carefully any pre-conditions to exercising the break. If the tenant is required to pay its rent in full, then it risks losing its right to break the lease if it has not paid all the rent due by the break date.

·       The moratorium applies to business tenancies, regardless of whether they have been contracted out of the 1954 Act.

·       The moratorium doesn’t apply to licences to occupy; tenancies at will; or short-term tenancies not exceeding 6 months.

·       No conduct by or on behalf of a landlord during the moratorium period is to be regarded as waiving the right to forfeit for non-payment of rent, other than an express waiver in writing. This will enable landlords to conduct negotiations with tenants during this period without compromising their rights, although they will need to be careful not to do anything which waives the right to forfeit once the moratorium is lifted.

·       The moratorium also applies to any forfeiture proceedings existing at the time the new law came into force.

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