Friday, 19 June 2020

COVID-19: Extension of Moratorium on Forfeiture of Business Leases & New Code of Practice

The government has announced that the temporary moratorium on forfeiture of commercial leases in Section 82 of the Coronavirus Act 2020 will be extended from 30 June until 30 September 2020.

In an oddly worded press release the government has said that it will lay a statutory instrument to amend the Coronavirus Act to extend the time period for “suspension of the forfeiture of evictions” [sic] from 30 June to 30 September, meaning no businesses will be forced out of their premises if they a miss a payment in the next three months.

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 will now run until 30 September 2020.

The announcement appears to be a U-turn that will bring welcome relief to many business tenants with the June quarter day (24 June) fast approaching. Up until yesterday the draft code in circulation made no mention of extending the moratorium.

The extension lasts until the day after the next quarter day (29 September), and so unless it is extended further, landlords will regain forfeiture rights on 30 September 2020 unless all outstanding rent has been paid.

The government is also going to pass secondary legislation to prevent landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 189 days of unpaid rent, and the time period for which this measure is in force will also be extended from 30 June to 30 September 2020.

An amendment to the Corporate Insolvency and Governance Bill has also been tabled which will extend the temporary ban on the use of statutory demands and winding-up petitions where a company cannot pay its bills due to coronavirus until 30 September 2020.

The moratorium as set out in the Coronavirus Act applies to all commercial tenants, not just those who can’t pay their rent because of coronavirus. The Act itself doesn’t state that the arrears must have arisen as a result of the current crisis.

However, alongside the announcement of the extension, the government has also launched a new voluntary code of practice for commercial landlords and tenants, which makes it clear that the government expects tenants to continue rental payments where they are able to do so.

The code has been developed with leaders from the retail, hospitality and property sectors to provide clarity for businesses when discussing rental payments and to encourage best practice so that all parties are supported.

The code is voluntary for businesses, and so it does not override the terms of any leases or other related documentation.

The code is relevant to all commercial leases held by businesses in any sector which have been impacted by the coronavirus pandemic. 

The code seeks to support businesses “to come together to negotiate affordable rental agreements”.

However, it stresses that tenants should continue to pay their rent in full if they are in a position to do so and advises that others should communicate with their landlord and pay what they can, whilst acknowledging that landlords should provide support to businesses if they too are able to do so.

Landlords should provide support to a tenant where reasonably possible, whilst having regard to their own financial commitments and fiduciary duties. Many landlords’ hands will be tied by their own funding agreements, and so the co-operation of lenders will also be required, which is outside the scope of the code.

With that in mind it’s encouraging that UK Finance has confirmed its members’ continued support for commercial landlord customers including amendments to facilities and capital payment holidays, and it issued guidance in advance of the publication of the code.

The code also encourages tenants and landlords to be transparent in their discussions and to act reasonably and responsibly whilst recognising the impact that coronavirus has had on businesses’ finances.

The ministerial foreword to the code acknowledges that the statutory measures (moratorium on forfeiture etc) “cannot last forever”, which is why the government has worked with industry to develop this code, which lasts (with the support of its signatories) until 24 June 2021.

To date the signatories include British Chambers of Commerce, British Property Federation, British Retail Consortium, Commercial Real Estate Finance Council of Eurpope, Revo, Royal Institution of Chartered Surveyors, UK Hospitality and several other organisations listed in the code.

The overriding principle of the code is that it is in the interests of both landlords and tenants to do everything reasonable to enable otherwise viable businesses to continue operating through the period of recovery, and all parties should act in good faith, reasonably, flexibly and with transparency.

The following examples of concessions are given in the code, which are not intended to be exhaustive.

·       A full or partial rent-free period for a set number of payment periods.
·       A deferral of the whole or part of the rent for one or more payment periods.
·       The payment of the rents over shorter payment periods for a set time (e.g. monthly rather than quarterly) including provision for their payment in arrears.
·       Rental variations to reduce ongoing payments to a current market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site, incorporating any period during which the site was closed.
·       Landlords drawing from rent deposits on the understanding that the landlord will not then require that the deposits be ‘topped up’ by the tenant before it is realistic and reasonable to do so.
·       Reductions in rent, either in whole or part, across other units occupied by the tenant and owned by the landlord, as part of a negotiated agreement applying to a portfolio of units.
·       Landlords waiving contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable.
·       Provisions for ending the solutions on a fixed date, or on reaching the trigger point of particular circumstances.
·       Tenants and landlords agreeing to split the cost of the rent for the unoccupied period between them.
·       Any of the above in return for other arrangements e.g. a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, or an extension of the lease.

The code also addresses insurance and service charges. These payments are meant to be non-profit making, and so should be paid in full, but service charges should be reduced accordingly where the lack of use of a property has lowered the service charge costs incurred. Conversely, it is also acknowledged that service costs may increase to make a building COVID-19 compliant.

Any solution reached in relation to service charge should take into account the RICSProfessional Statement Service Charges in Commercial Property,1stedition and of all RICS guidance in relation to service charges and COVID-19.

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