Suspension of forfeiture of commercial leases introduced in the midst of the COVID-19 pandemic
The Government instruction for all non-essential businesses to close for at least three weeks will undoubtedly have an effect across all industries and sectors.
In an attempt to mitigate some of these negative effects, a range of measures have been announced by the Government to assist businesses including a 12-month business rates holiday and a job retention scheme.
One of the most recent measures announced by the Government as part of the Coronavirus Act 2020 (“the Act”), which was given Royal Assent on 25 March, is a temporary suspension of the ability to forfeit commercial leases, which is set out in section 82 of the Act, full details at the bottom of this page.
What is forfeiture?
Most commercial leases include a clause which allows a landlord to re-enter premises and bring a lease to an end where the tenant has been in arrears with rent for a certain period (often 21 days), where the tenant has committed other breaches of tenant covenants, or where the tenant has entered into an insolvency process.
Forfeiture can be carried out either by peaceable re-entry, which means that the landlord can simply enter the premises and change the locks (provided that no one is at the premises who objects to this) or by making an application to Court. Where the basis of forfeiture is rent arrears, the most common practice is to re-enter the premises rather than issuing Court proceedings.
Unless the tenant applies to Court and obtains relief from forfeiture (which would involve paying all arrears and the landlord’s costs) the lease is at an end and the tenant will no longer be able to occupy the premises.
What does section 82 of the Act say?
What does this mean for Landlords?
Landlords that otherwise would have been able to exercise their right to forfeit a commercial lease due to non-payment of rent are now prevented from doing so until at least 30 June 2020. Whilst no one knows how long the current situation will continue we cannot rule out an extension to the relevant period.
Commercial tenants, therefore, have a period of breathing space although it must be remembered that the rent remains due, and the Act introduces only a suspension on the ability to forfeit and does not affect the obligation to pay rent. Tenants should also keep in mind that their leases may be brought to an end by forfeiture for breach of other tenant covenants, which is not prevented by the Act.
The measures will undoubtedly be welcomed by commercial tenants and a number of household names, including Primark and Burger King, have already confirmed to their landlords that they will not be paying the March quarter’s rent, which was due on 25 March.
Enforcement action can still be taken
It is also notable that the Act does not prohibit landlords from taking other enforcement action against tenants including issuing Court proceedings for unpaid rent or using the Commercial Rent Arrears Recovery procedure (which enables landlords to seize tenants’ goods where there are rent arrears). Early dialogue with landlords is therefore key.
A new collaborative approach?
Although the measures introduced and the current crisis generally is likely to have a negative effect on landlords’ short-term cash flow and the value of many landlord’s property portfolios, it appears that landlords may be more willing to take a collaborative approach with their tenants.
We are likely to see many tenants withholding rent, requesting rent holidays, rent-free periods or a re-structure of how rent is paid. In practice, landlords are likely to be willing to work with their tenants to ensure that the effects of the current economic situation can be minimised and preserve their portfolios for the future.
For more information on the practical ways in which that may be done please see our article on COVID-19 and dealing with rent concessions here.
We understand that these changes and the general day-to-day uncertainty may cause concerns, however, our team is ready to assist commercial landlords and tenants. Please contact the team on on 0113 849 4000 should you require assistance.