Covid- 19: Weapons in a Tenant’s Armoury

Much has been written about the effect of Covid-19 on the performance and enforcement of contracts. The Government has recognised that parties to some contracts may find it difficult or impossible to perform those contracts in accordance with agreed terms, as a result of the impact of the pandemic.

Rent

In the context of commercial landlords and tenants, much of the focus has understandably been on a tenant’s ability to pay rent. In a bid to mitigate the effects of Covid-19 on tenants who cannot pay, the Government has, through a series of measures, added weapons to a tenant’s armoury in the face of a landlord’s demand for rent:

• Under the Coronavirus Act 2020, legislative protection is afforded to business tenancies by limiting a landlord’s right of forfeiture. Forfeiture by action or peaceable re-entry for failure to pay rent cannot occur between 25 March 2020 and 30 June 2020. It remains to be seen whether this period will be extended.
• Under legislation which came into force on 25 April 2020, Commercial Rent Arrears Recovery (“CRAR”) (under which, if rent remains unpaid after service of a notice by the landlord, the landlord can instruct an enforcement agent to recover the arrears by seizing control of the tenant’s goods and selling them at auction) has also been restricted. Under the previous rules, CRAR was available if a tenant was in arrears of a minimum 7 days’ rent. That minimum has been increased to 90 days’ rent. These changes are almost pointless as 90 days is one quarter’s rent and landlords cannot use this method of enforcement if the premises are locked up, as enforcement agents can’t break into the property without a court order.
• The Government has also issued a guidance note on responsible contractual behaviour. The guidance in that note is that parties should be “reasonable and proportionate in responding to performance issues and enforcing contracts, acting in a spirit of cooperation and aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party, the availability of financial resources, the protection of public health and the national interest.” Responsible behaviour is expressly encouraged in relation to requesting and making payment under the contract.
• On 20 May 2020, the Government published its Corporate Insolvency and Governance Bill. Assuming that the Bill is enacted in its current form, then in summary:
• a creditor cannot base a winding-up petition on a statutory demand that was served from 1 March 2020. This will apply until 30 June 2020 or for a month after the Act is passed. Statutory demands served during this period are thus voided.
• a creditor will not be able to issue a winding up petition in the period from 1 March 2020 to 30 June 2020, or for a month after the Act is passed, unless the creditor has reasonable grounds for believing that:

1. coronavirus has not had a financial effect on the company; or
2. the company was insolvent even if coronavirus had not had a financial effect on the company.

These measures apply in the corporate not personal insolvency context.

The combined effect of this is that there are means by which tenants can encourage their landlords, whose teeth are being restricted by the Government, to agree terms for rent concessions or deferment where necessary.

Break right

If a tenant anticipates that it will be unable to continue paying the rent or will no longer require the premises, it should check its lease to see whether it has any right to bring the tenancy to end by, for example, exercising a break right in the lease.

Alternatively, in a falling market where premises are over-rentalised, tenants with an upcoming break right may consider exercising that right as a tool to negotiate favourable terms for a new lease of the premises with their landlord. The same can be said of tenants who can initiate a statutory renewal of their business tenancy.

Tenants should note that leases usually require all rent payments to be up to date in order for the break to be effective. If there are any imminent break dates, then any rent concessions or deferments will need to be considered, otherwise there may be uncertainty as to whether the breaking party has validly exercised the right.

Dilapidations

One less well trodden topic is the effect of Covid-19 on a tenant who is closing its premises and is exposed to a landlord’s claim for damages at the end of the term. In those circumstances, a tenant would be well advised to consider the implications of Section 18(1) Landlord and Tenant Act 1927 (“the Act”) on a landlord’s claim in the current climate.

Section 18(1) of the Act limits the damages available for breach of a repairing covenant or a covenant to leave premises in repair on termination of a lease. It provides that damages are limited to the diminution in value of the landlord’s reversion caused by the breach/disrepair. Where there is no difference in value resulting from the disrepair, the landlord will recover nothing.

A tenant could argue that because it cannot access the premises, because lockdown is still in place (in most sectors), and as social distancing will apply when lockdown is eased, that will effect the potential income the landlord could obtain from the premises. In turn, the diminution valuation under the Act will be effected. The tenant may argue that the landlord wouldn’t seek to do the works immediately, it would be money ill spent until there is a proven market where the landlord can re-let the property, and/or that the landlord would seek to temporarily let the premises for any use it can get, negating the need for any fit-out or repairs.

Conclusion?

It’s time for your landlord to be reasonable.