Commercial rent and the Pandemic – what next for landlords?

Back in 2020, when the Covid-19 pandemic was in full swing, the government brought in a range of measures that effectively curbed the right of landlords to recover rent arrears from commercial tenants, regain possession of premises from those who had fallen behind in their payments, and prevented landlords from forfeiting leases. Commercial solicitors for landlords up and down the country were inundated with queries and were busy providing commercial landlords advice for those affected.

Initially, there was an ‘end date’ in sight when landlords could start to try and recoup the losses and arrears they’d incurred during the height of the pandemic. However, recently the rug has been pulled out from underneath landlords, as under the Coronavirus Act 2020, the moratorium that prevents eviction or foreclosure of commercial leases on the grounds of non-payment has been extended to the 25th March 2022.

A moratorium on debt recovery

Prior to the Covid-19 crisis and the instigation of the 2020 Act, landlords were entitled to remove goods under the Commercial Rent Arrears Recovery clause if a total of 544 days’ rent was outstanding. Now, the right to carry out recovery has been postponed until March 2022.

The Corporate Insolvency and Governance Act 2020 had also stopped landlords from presenting a winding-up petition (unless they believed that Covid-19 was not the primary cause of the debtor’s financial insolvency). That has now been rescinded and may be one of the only ways commercial landlords can begin to claw back some of the losses they’ve incurred over the past two years.

An uneven playing field

The government is aware that certain sectors, such as retail, catering, and hospitality, have suffered far more of an impact than others, and sector-specific legislation is due to be introduced that will help landlords (and their tenants) tackle rent arrears without devastating the tentative shoots of recovery that we’ve seen in the past couple of months. The new system will apply only to businesses that have been directly affected by the pandemic, and those who have carried on trading normally will be subject to the previous legislation, meaning landlords can take action to recover overdue rent payments.

One of the elements is a ‘ringfenced arrears’ concept, which means that the new legislation will only apply to debts built up from March 2020 onwards. Debts or arrears before that period (and any that are accrued after the moratorium has been lifted) are not protected and landlords are well within their rights to pursue these outstanding payments. Commercial property solicitors in London are recommending that both landlords and tenants tackle these earlier outstanding debts first through negotiation and if things escalate, arbitration when a resolution cannot be reached between the landlord and the tenant.

If outstanding debts date back to before March 2020 then landlords also have the right to circumvent the ‘no eviction’ rule, especially if the tenant has breached other conditions of their tenancy agreement or lease.

Is it going to work?

There’s concern on both sides that the extension of the moratorium will result in tenants building up ever greater levels of debt, and landlords struggling to stay afloat while having almost no income from their properties. However, the pandemic has changed everything, and commercial solicitors for landlords are seeing an influx of queries from property owners desperate for guidance on what to do next. Currently, the situation is at a stalemate, and while the full range of rent debt recovery options is not available, the only other option that landlords have is to pursue the claims through the civil courts. The capital has been particularly badly affected by the commercial rent arrears crisis, and commercial property solicitors in London are advising landlords to consider all the options available to them, including civil action.

Of course, the time and additional costs of this method of debt recovery have to be factored into the overall cost, but there have been a series of successful civil cases recently where the courts have found in favour of the landlord. Acting now may also allow landlords to take full advantage of the renewed availability of winding up proceedings post-September 2021, as the judgement can be used as proof of inability to pay on the part of the tenant.

Nobody has come out of the Covid crisis unscathed, and both commercial tenants and landlords have been hit hard. If you’re a commercial landlord and you’re worried about rent arrears and how to recoup your losses, talk to one of our commercial solicitors for landlords and get expert, no-nonsense and up-to-the-minute advice today.

If you would like to talk in confidence to a Commercial Property expert, please email or phone 020 8349 0321.

What are Commercial Property landlords’ rights around recouping rent arrears?

The Coronavirus pandemic has hit many sectors such as hospitality, beauty, and retail with savage force.  Throughout 2020, attention has been focused mainly on the plight of tenants who have seen their customer footfall and/or turnover plummet.  However, many landlords are also struggling to cover their own financial commitments due to tenants being unable to pay rent.  Our North London commercial property solicitors regularly advise landlords who are treading a fine line between collecting rent to cover their liabilities and at the same time supporting tenants’ businesses to ensure investment properties remain occupied once the pandemic ends. 

If you and your team are preparing a strategy for collecting rent on the March quarter day, below are some answers to questions our commercial property solicitors are being asked by clients.

What are my legal rights regarding collecting rent from my commercial property tenants?

At present, commercial landlords are restricted regarding the legal actions they can take against a tenant who cannot or will not pay rent.  Until 31 March 2021 landlords cannot evict commercial tenants for rent arrears or use the Commercial Rent Arrears Recovery (CRAR) procedure unless an amount of 366 days’ rent is owing.  These restrictions have been in place since March 2020; however, when extending the restrictions in December 2020, the government made it clear that no further extensions would be announced:

Secretary of State for Housing Rt Hon Robert Jenrick MP said:

“I am extending protections from the threat of eviction for businesses unable to pay their rent until March 2021, taking the length of these measures to one year. This will help them recover from the impact of the pandemic and plan for the future.

“This support is for the businesses struggling the most during the pandemic, such as those in hospitality – however, those that are able to pay their rent should do so.

“We are witnessing a profound adjustment in commercial property. It is critical that landlords and tenants across the country use the coming months to reach agreements on rent wherever possible and enable viable businesses to continue to operate.”

Restrictions on insolvency measures including statutory demands and winding up petitions have also been extended until the end of March.

If I cannot evict a commercial tenant or take legal action for payment of rent arrears, what are my options?

In June 2020, the government published a code of practice for commercial landlords and tenants.  The voluntary Code is designed to “support businesses to come together to negotiate affordable rental agreements. It builds upon the discussions already taking place by giving those tenants and landlords affected by the crisis the tools to come to a mutually beneficial agreement; ensuring that best practice becomes common practice.”

The Code asks both landlords and tenants to be flexible, act in good faith, and support the long-term viability of businesses and the jobs they provide.  For example, tenants who are seeking concessions must be transparent as to why such concessions are required and provide relevant financial information to the landlord if requested.  In turn, landlords should provide concessions where they can, considering their own fiduciary duties and financial commitments.  If a landlord refuses to allow requested concessions, they/it should give reasons for doing so. 

In another example of mutual support, landlords can elect to reduce service charges during lockdowns when a premise is not occupied.  And in return, tenants can agree to pay additional service costs to fund Coronavirus-related health and safety requirements that landlords are required to comply with. 

Specialist Landlord and Tenant Solicitors in North London

Both landlords and tenants are being asked to ‘share the pain’ during the pandemic and co-operation will be needed for many months to come.  A commercial property solicitor can advise you on your rights as a landlord under the existing commercial lease agreement.  They can also assist you with re-negotiating terms per the principles of the government’s Code of Practice.

For further advice please get in touch with one of our North London Commercial property solicitors by email or on 020 8349 0321.

Coronavirus Commercial Property Q&A

Like many other sectors, the commercial property industry has been significantly affected by the coronavirus pandemic and the subsequent Government lockdown and economic slump.

The rules around commercial leases have also been changed temporarily, to help businesses that are struggling due to the crisis, which has left landlords and property management firms with many questions.

To try and provide clarity to this ever-evolving situation, we have looked at some of the most common questions landlords have and provided answers to help them better understand the current rules regarding commercial leases.

Can my tenant stop paying rent or end their lease? 

Considering the extreme financial strain that many businesses are experiencing many tenants are beginning to refuse to pay rent, ask for a reduction in rent or are seeking to terminate their lease early.

Whether a tenant can do this and on what grounds will vary from one lease to the next, depending on what was agreed under the original terms of the lease.

Landlords should review and consider:

  • any break clause that allows tenants to terminate the lease early;
  • any turnover provisions dependent on the income generated from the premises; and/or
  • any force majeure clause.

Most leases provide for rent to be payable without deduction, meaning that tenants will not be able to withhold rent because of COVID-19, unless any specific lease provisions allow them to do so. Meanwhile, rent suspension clauses generally only relate to where a property is damaged or lost altogether due to destruction.

The common law doctrine of frustration may come in to play when it comes to terminating a lease. Tenants may try to prove that there is some form of illegality or failure of common purpose that renders performance of the lease/contract impossible or so radically different from the parties’ expectations and that termination is therefore justified.

This approach is yet to be thoroughly tested via the courts and it is not clear whether the narrow definition of frustration applies to a commercial lease. A court is not likely to relieve a tenant of their contractual obligations as the bar set for such a claim is very high.

My tenant has stopped paying rent, can I evict them?

As part of the Government’s Coronavirus Act 2020 (the Act), new measures were introduced to protect commercial tenants. Section 82 of the Act bans the forfeiture of commercial leases until 30 June 2020 for non-payment of rent due to COVID-19, thus preventing evictions.

It is not yet clear whether the Government intends to extend this period further, but it has indicated it may depend on the requirements of the lockdown period.

My property is empty, but trespassers have moved in, does this rule prevent me from evicting them?

No – this legislation is designed solely for existing tenants. If you have trespassers or squatters in your property you can still undertake a repossession order under the existing rules.

If I cannot evict them, do they still have to repay the rent owed?

Yes – despite the Government’s move to prevent evictions from commercial premises, rent arrears will still accrue and are expected to be repaid in future.

In some cases, this may be by agreement between a landlord and tenant, but in other cases, landlords may be required to seek debt recovery procedures to recover rent that is owed (be aware that some procedures have been temporarily banned). Before taking either step it is recommended that you seek legal advice.

If I can’t evict them can I take other debt recovery steps, such as a statutory demand?

The Government has temporarily banned the use of statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions presented from Monday 27 April, through to 30 June, where a company cannot pay its bills due to coronavirus. This will help ensure these companies do not fall into deeper financial difficulty.

The Government is also introducing new legislation to provide tenants with more breathing space to pay rent by preventing landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent.

However, the Government has made it clear that tenants shouldn’t use this as an opportunity to avoid paying or delaying a rent payment if they are not significantly affected by COVID-19.

What other steps should I be taking if I cannot use debt recovery or forfeit the lease via an eviction? 

Most standard commercial leases include an obligation on the tenant to comply with all statutes and notices or orders made by competent authorities, which means that they would be in breach of that covenant if they fail to comply the Government’s current COVID-19 directions. Landlords also must comply with this and it is why you should try to work with tenants to come to a suitable arrangement.

Therefore, in the first instance, it is advised that you seek legal advice before opening up a dialogue with your tenant. Once you have taken appropriate legal advice you may wish to come to an agreement with your tenant over current and future rent payments. Depending on your own needs it may be possible to agree on how the rent will be paid in future, including a method for making up rent arrears.

I have a commercial mortgage on the property that needs to be paid, what support is available to me? 

The Government has supported the buy-to-let residential sector via guaranteed mortgage holidays, however, the same support hasn’t been offered to commercial landlords that have a mortgage to pay.

Despite this, many lenders are extending similar offers to commercial landlords and it is recommended that you speak to your mortgage provider to secure a payment holiday if you require one.

I’m a landlord for a property that is in a wider shopping centre/area that is required to close as a result of the COVID-19 measures?

If a larger landlord closes a centre or any common parts, tenants and their landlords will need to check the lease as to the overall landlord’s obligations and any potential claims.

My tenant is eligible for a grant based on their business rates. However, I pay their business rates as part of the rental agreement. Can I receive the grant instead? 

The grants are given to the ratepayer, who would presumably be the landlord in this case. Unless the rateable value of the hereditament is less than £15,000 (in England) the landlord would not qualify for the grant. The landlord would, in any case, need to decide whether to pass on any grants received to the tenants if an offer were made to them.

Should Tenants ‘Keep Open’ their Premises?

Some lease clauses require a business to ‘keep open’ or specify ‘operating/opening hours’. Of course, due to the restrictions that came into effect on 26 March 2020 under the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020, this is no longer possible.

Even if a business can technically remain open, this may not be possible if a business owner decides they do not wish to expose the public to the risk of infection.

Where a tenant is obliged to ‘keep open’ the premises the regulations provide a defence to the requirement if it can be established that by keeping the premises open, they will be acting unlawfully. What’s more, the courts are often reluctant to enforce specific keep open provisions to force tenants to re-open.

I have insurance on the property, could this cover the current disruption to rents? 

Every insurance policy is somewhat different and so landlords should review their policy and speak with their insurance provider or broker to understand what cover is available to them.

While some policies may include business interruption cover, it is unlikely to cover much more than damage to their property or, in a limited number of cases, where Government action has meant that it is illegal for premises to remain open.

Unfortunately, cover for infectious diseases is often an opt-in extra and most will require the disease to have been classified as ‘notifiable’, which COVID-19 has been since 5 March 2020.

Business owners and landlords are finding that their policy, despite various clauses and protections, does not provide a payment as a result of COVID-19. If you believe that your insurer has taken steps to prevent you from claiming under the cover you have, you may be able to take legal action against them, so you should seek legal advice first.

How we can help

We appreciate that you may have many more questions that you wish to ask that are specific to your requirements. If you would like support with your commercial property queries, please speak to our commercial property team.

Forfeiture of lease – Protection for tenants (COVID-19)

In order to protect tenants the UK Government changed a well-known Landlord and Tenant law.

The easiest way for a landlord to get rent out of their tenant who hasn’t paid is to “change the locks at the property”.  This is officially known as forfeiture for non-payment of rent. This is a pure real estate right – it doesn’t apply to other commercial contracts. It is generally effective as no business owner wants staff to turn up to their office on Monday more to find the locks have been changed. Even more so for customers of a retail store!

In light of the coronavirus the Government changed the law so that landlords are prevented from changing the locks and forfeiting until the end of June. That is in recognition of the fact that shops are shut and office workers are being told to work from home (WFH).

So Landlords can’t forfeit for now (note this is not a rent holiday – just a delay in landlords enforcing payment).

Whilst this sounds like good news to tenants the UK Government has NOT changed another law which landlords can use – winding up.

A landlord can “wind up” a company if it does not pay an undisputed debt. Rent is an undisputed debt.

Landlords can just apply to court to do this but most may serve a statutory demand to be safe (it buys them some protection). You would get a statutory demand to the company’s registered office.

If that sounds contradictory; it is – and many of my clients agree. It is a shame that the UK Government hasn’t called a moratorium (ie a stop) on UK company involuntary insolvency but it hasn’t.

So what should you do?

I recommend talking to your landlord first – they are expecting the call I assure you. Ask for a rent free. Or maybe half rent for 3 months to take you over the worst period. Failing that trying for monthly rents for the next 12 months – or until the end of the lease.

It is a negotiation done in good faith – you have some law on your side but not all law.

Whatever you “agree” though make sure you email an agreement and get them to confirm.

If you need further assistance you can always call us on 020 8349 5504 or send an email and we will do our best to help.

COVID-19 Top 5 tips for Commercial Tenants

The current lockdown restrictions will have caused problems commercial tenants across all sectors. Our Retail specialist, Robert Rosenberg gives his top 5 tips for commercial tenants:

1. Really this should be one, two and three – TALK to your landlord. Landlords should not be scary but they are scared of this. We all are. They have families too.  You need to “share the pain” with landlords. We recommend picking up the phone and start with small talk. Then tell them how you are having to make cuts but that your staff and customers are so important to keep going.  Then ask them for their help. Start back asking for 3 months’ rent free. This is clearly the best.

2. If you can’t get rent free ask for monthly rents.  If you pay quarterly it is a huge drain on cash flow – if you can pay monthly that is clearly fairer.

3. Ask for a discount off the rent – say 50% for a couple of months.

4. In normal times (if you can remember them) a landlord can change the locks on you if you don’t pay the rent.  Not at the moment – the UK Government has put a stop to that until the end of June.

5. Ask for a lower service charge – if no one is around to tend to the building then the service charge should be lower.

If you need further assistance you can always call us on 020 8349 5504 or send an email and we will do our best to help.

Commercial property prices and rental values grew last month, studies reveal

A new study suggests that UK commercial property values grew by 0.25 per cent in January – and that prices have held up ‘better than expected’ since the Brexit vote.

The data, based on 3,052 property investments with a total capital value of £44.5billion, suggests that growth slowed last month, while commercial property values in some areas of London, such as the West End, actually fell slightly.

However, MSCI’s IPD Real Estate Index reveals an upward trend or ‘recovery’ in growth since the European Union (EU) Referendum on 23 June, which has only just begun to ‘lose steam’, the group has said.

Meanwhile, the latest CBRE Monthly Index suggests that commercial property rental values rose by 0.1 per cent last month.

Their data suggests that the industrial sector in particular managed to maintain ‘strong performance’ into 2017 – with industrial rental values growing by 0.3 per cent.

In the retail warehouse sector, rental value growth reached 0.2 per cent, up from 0.1 per cent in January.

Overall, the CBRE said that offices outside of London and the M25 zone experienced the strongest rental value growth last month, at 0.6 per cent.

London and the North West “outperform” rest of UK in commercial rent growth

Commercial property rental values increased by 0.4 per cent in the final three months of 2016, the latest CBRE report has revealed.

The figures represent the slowest quarterly growth in the past year, compared to total growth of 3.7 per cent in 2016, and five per cent growth in 2015.

CBRE’s Prime Rent and Yield Monitor indicates that the industrial sector saw the biggest increase in rental values in the three months to December 2016, with prime rents growing 1.1 per cent.

London and North West industrial rents “outperformed” all other regions, the report said, growing by 2.8 per cent and 2.7 per cent respectively.

As a whole, the industrial sector recorded the largest increase in prime rent over the year, growing by 6.5 per cent. High streets followed closely at 5.4 per cent growth for the year, despite just 0.3 per cent growth in the final quarter.

The office sector remained stationary, recording no increase in rents.

Likewise, yields for prime offices and retail warehouses were unchanged in the final quarter, while yields across all UK prime commercial property increased by 11 basis points (BPS) over the course of 2016.

Miles Gibson, Head of UK Research at CBRE, said: “Despite 2016 being characterised by uncertainty in the UK’s political and economic landscape, prime commercial property sector has again shown its resilience with positive, albeit easing, growth in prime rents across all main sectors. The Industrial sector in particular has helped steady the ship throughout 2016, outperforming the national average in every quarter.”