Tough times for tenants: considering your options

The June quarter day will mean that corporate occupiers are facing mounting cashflow pressures as the harsh financial and economic realities of the COVID-19 pandemic begin to be felt. This article considers the predominantly Government-led support available to beleaguered tenants.

Extension to forfeiture restriction: The Government has recently announced that the restriction preventing landlords from forfeiting a tenant’s lease for non-payment of rent and other financial obligations is extended from 30 June to 30 September 2020. This extension will provide tenants with a degree of breathing space to undertake cashflow restructuring. Unless otherwise agreed, however, a tenant will continue to be liable for any rent and other sums that remain unpaid plus accrued interest. Also, landlords can still pursue forfeiture for tenant breaches that are non-financial (e.g. repair).

Court proceedings: Although a landlord is still entitled to pursue debts through proceedings in the county court by obtaining a CCJ and then enforcing this judgement against a tenant’s assets, the ban on statutory demands and winding-up petitions for companies has also been extended to 30 September 2020. This offers further support to tenants by giving them time to restructure financial commitments without the concerns of breaching banking covenants or the risk of damage to credit ratings.

Commercial Rent Arrears Recovery (CRAR): The amount of rent that must be unpaid to entitle a landlord to serve a CRAR notice or seize goods under CRAR has been increased from 90 to 189 days. This means that CRAR cannot be exercised even where a tenant has paid nothing for two quarters (being 187 days’ rent for the March and June quarters). The provision is also extended until 30 September 2020.

Financial support: Rates relief is available for businesses across the retail, hospitality and leisure sectors and will apply for the duration of the 2020/2021 tax year. Also, SGBF grant funding (see here) is available for some businesses in England subject to satisfying qualifying criteria.

Re-gearing: It may be possible for the parties to negotiate mutually beneficial alternative lease terms. If a tenant is entitled to terminate its lease early, for example, then it may approach its landlord to agree to the removal of this entitlement in return for reciprocal concessions. Examples might include a rent-free period, wider rent suspension or deferment provisions to counter pandemic risk, rent to be paid monthly in arrears (rather than quarterly in advance), a reduced or capped service charge or rent to be calculated as a percentage of turnover rather than based on a market rent.

Break clauses: If a tenant is looking to exercise a break option, then care should be taken to ensure that any pre-conditions are satisfied. Where, for example, a tenant is obliged to hand back the premises ‘with vacant possession’, this means that the tenant must have removed all of its fixtures and equipment and perhaps also undertaken repair and reinstatement works. Practically speaking, it may not be possible to comply with this provision given the current COVID-19 restrictions.

Code of Practice: The Government has issued a Code of Practice (see here) for commercial property relationships during the COVID-19 pandemic. The Code encourages landlords and tenants to work collaboratively and to behave responsibly. As the Code is voluntary, it is not legally enforceable, so its influence on the landlord and tenant relationship is questionable.

In many cases it will be in a landlord’s best interests to support its tenants through difficult times so, regardless of the parties’ legal entitlements, it would be prudent for tenants to engage with their landlords to find mutually beneficial solutions to the problems presented by the current crisis.

If you are a commercial tenant that is considering its options to manage cashflow as a result of the COVID-19 pandemic, please contact Simon Massey for more information on the assistance available.