The impact of COVID-19 on commercial and residential tenancies
Commercial Tenancy Arrears
What are the current restrictions?
The following restrictions are currently in place:
- A moratorium on the forfeiture of commercial leases for non-payment of rent until 25 March 2022.
- Commercial Rent Arrears Recovery (CRAR) cannot be exercised unless the amount of net unpaid rent exceeds certain thresholds. The thresholds were not increased again in June 2021 and 554 days’ outstanding rent is required to exercise CRAR on or after 25 June 2021 until 25 March 2022 (unless extended again).
- No winding-up petition may be presented against a debtor company unless the creditor has reasonable grounds for believing that (a) coronavirus has not had a financial effect on the debtor; or (b) the debtor would have been unable to pay its debts if coronavirus had not had a financial effect on the debtor. This means that statutory demands are therefore no longer an effective threat for arrears which fell due on or after March 2020. This restriction is in place until 30 September 2021. From 1 October 2021 until 31 March 2022, there is a slight change to the rules but landlords are prevented from presenting winding up petitions against any commercial tenants in respect of rent or other sums payable under a tenancy which are unpaid due to the financial effect of Coronavirus. The protection extends to business tenancies to which Part 2 of the Landlord and Tenant Act 1954 apply and also to those where the protection of the 1954 Act is excluded.
More details can be found at: Commercial rent arrears: what are the latest restrictions on landlords' remedies this quarter?
The Government Code
In addition to these restrictions, the Government introduced the “Code of Practice for commercial property relationships during the Covid-19 pandemic”:
- This voluntary code was introduced in June 2020 and reviewed in June 2021. It has been extended and is due to be “strengthened” during the upcoming months, in anticipation of legislation to follow (see below).
- The code aims to facilitate discussion between landlords and tenants and confirms that tenants who can afford to pay their rent should do so.
- A new annex to the code was published in April 2021 which included a form for a tenant to complete about the impact of the pandemic on their ability to pay rent and service charges from 25 March 2020. There is also a form for a landlord to complete in responding to an offer from a tenant in relation to payment of rent and service charges.
Are there any other options available?
The options which remain available for recovering commercial tenancy arrears include pursuing a claim via Court proceedings (subject to the Government’s proposed arbitration scheme – see below), pursuing guarantors and any former tenants/guarantors who remain liable under guarantees and drawing down on any rent deposit. Forfeiture by peaceable re-entry or Court proceedings is available for breaches other than non-payment of rent.
What can we learn from the decisions being handed down by the Courts?
During the first half of 2021, there were some decisions which gave an indication of the Courts’ approach in arrears cases. In the first reported cases on the recovery of pandemic arrears (Commerz Real Investmentgesellschaft mbh v. TFS Stores Limited  EWHC 863 and Bank of New York Mellon (International) Limited v. Cine-UK Limited and others  EWHC 1013), the landlords successfully obtained summary judgment against tenants for commercial rent arrears accrued during the pandemic. The key points from these decisions are:
- The Court rejected arguments that the landlords were prevented from bringing claims for arrears as a result of any of the restrictions introduced by the Government.
- The code of practice does not alter the legal relationship between landlords and tenants and is voluntary. However, it remains to be seen whether a Court will impose sanctions (including costs sanctions) where landlords or tenants fail to comply with the code’s provisions/spirit.
- In the TFS Stores decision, the Court found no obligation on the landlord - on the wording of the particular insurance covenant - to insure the tenant’s business against loss, nor could the rent suspension clause be interpreted to apply where the shopping centre/unit was closed as a result of a legal requirement. The rent suspension clause only operated where there was damage or destruction to the unit.
- Similar findings were made in the Bank of New York That decision noted that it has always been open to tenants to protect themselves through business interruption insurance and that the approach to contractual interpretation – reflecting the parties’ negotiated allocation of risk – should not be changed because of the present emergency.
- The Court in Bank of New York also rejected the tenants’ attempt to argue for the frustration, or “temporary” frustration, of the leases as a result of the lockdowns. In the Master’s view, the remaining periods left on the leases after the limited period of enforced closure (ranging from 1.5-12.5 years) were still significant and he therefore saw no real prospect of the tenants successfully arguing that the COVID-19 situation constituted such a “radical difference” so as to make it unjust for the leases to continue.
More details: Lockdown rent arrears: the High Court gives its (summary) view; Lockdown arrears: the High Court gives its view; Risk allocation in commercial leases: the High Court considers rent suspension, insurance and frustration arguments ; Property Patter Podcast: dealing with Covid-19 arrears and the future of commercial tenancy relationships
1954 Act Pandemic Lease Renewals
There have already been a number of County Court decisions (non-binding) in 1954 Act lease renewal cases since March 2020. The key points so far are:
- Market rent has been assessed by the Court in the usual way in accordance with the Landlord and Tenant Act 1954 (“LTA 1954”), based on comparables. However, the cases have shown an absence of appropriate comparables. In the case of WH Smith v. Commerz Real Investmentgesellschaft MBH (Winchester County Court, 25 March 2021, unreported), the rent was assessed at £404,666 - a significant reduction from the passing rent of £953,000. Interestingly (but open to some further debate), the Judge considered that the market had already priced in pandemic clauses. In S Franses v. The Cavendish Hotel (London) Limited (Central London County Court 18 June 2021, unreported), the yearly rent in the new lease was assessed at £102,000 against a passing rent of £220,000.
- Interim rent varies from case to case because it is payable from the earliest date which could have been specified in the Section 25 Notice or Section 26 Request. In WH Smith, it was assessed at £758,785 (when the retail market was “firmer”) and in S Franses, it was payable from January 2016 and assessed at £160,000 (a figure between the new rent and passing rent).
- Pandemic clauses have been debated as landlords and tenants consider how to provide for future pandemics in leases. In WH Smith, the Court determined the terms of a pandemic rent suspension clause. (The parties were already agreed on the principle of its inclusion, but there was an outstanding issue on the appropriate trigger). The Court favoured the tenant’s position and determined that the rent suspension clause should be activated by the compulsory closure of non-essential retailers since the tenant relied on these for footfall (although it noted that the position might be different on a High Street). The new clause required the tenant to pay 50% of rent (but all service charges) during the relevant period, subject to an obligation to account for any Government support received. In another case: Poundland Limited v. Toplain Limited (Brentford County Court, 2 July 2021, unreported), the Court rejected the inclusion of a pandemic clause sought by the tenant which would have reduced the rent and service charge to 50% during any “use prevention measure” imposed by the Government. The Court took the view that it was not fair and reasonable to impose such a clause where the tenant was likely to have access to reliefs provided by the Government. It also rejected the tenant’s request for a pandemic clause permitting the tenant not to comply with insurer’s requirements in the event of a future pandemic lockdown.
These cases and future cases will continue to turn on their own facts and, as far as pandemic clauses are concerned, the particular wording of the clause but these cases demonstrate how the Courts have approached the issues so far.
The Government’s call for evidence
The Government launched a call for evidence which closed on 4 May 2021. This considered the current restrictions on landlords’ remedies for recovering commercial rent arrears and what should happen after 30 June 2021 (when the restrictions were due to end). A wide spectrum of options was considered by the Government from lifting the restrictions to granting powers to an adjudicator (either binding or non-binding) to waive/defer arrears, extend or reduce the term of the lease and defer/waive an obligation to replenish a rent deposit. Views were invited on the potential options and details of the responses received were published in early August 2021 (see below).
What is the position going forward?
The Government has concluded from the responses to the call for evidence that the most appropriate way forward is to introduce a binding arbitration process for circumstances where landlords and tenants cannot agree liability for “ring-fenced” arrears which accrued during any period of lockdown. We await details of the proposed legislation which will govern this process, although these are not expected before early 2022.
In the meantime, the Government has published a statement confirming that it intends to strengthen its code of practice (see above) and that this will give an indication of the intended future principles of the legislation. The Government hopes that this will encourage further negotiations between landlords and tenants before binding arbitration is introduced.
The Government’s recent statement makes it clear that tenants should pay where they have been unaffected by closures and have the means to pay. Even for tenants affected by closures, the expectation is that they should begin paying rent (and interest) as required by their lease from the point at which restrictions were lifted for their sector. Given the Government’s accompanying indication that forfeiture is expected to return from 25 March 2022 as a remedy for rent arrears owed outside of any “ring-fenced” period, commercial tenants who still have rent debt will need to consider their position carefully during the upcoming months and try to conclude agreements with their landlords.
What are the current restrictions?
The eviction ban for residential properties was lifted on 31 May 2021, allowing the enforcement of all residential possession orders to resume. (Before 31 May 2021, evictions could only proceed in limited circumstances.)
In addition, the extended notice periods to seek possession of certain residential tenancies such as ASTs were reduced from 6 months to 4 months in most cases from 1 June 2021 until 30 September 2021. There are shorter notice periods where certain arrears grounds are relied upon or where there is anti-social behaviour.
Proceedings for the recovery of arrears of ground rent and service charges/the forfeiture of long leases may proceed, although there are some temporary procedural changes to possession proceedings until 30 November 2021.
There is a housing possession mediation pilot, known as the Rental Mediation Service, introduced from February 2021. This free scheme only applies to housing possession cases and is voluntary so matters will only be referred to the mediation pilot where both the landlord and tenant agree.
What will happen after 30 September 2021?
From 1 October 2021, the notice periods will revert back to the original notice periods prior to the Coronavirus pandemic. For example, service of a Section 21 Notice to terminate an AST will require at least 2 months’ notice. However, the changes have been implemented by a suspension of various paragraphs of the legislation introduced to extend the notice periods so there is a possibility that the suspension could be lifted and extended notice periods re-imposed between now and 25 March 2022. There are also new prescribed form Section 21 and Section 8 Notices from 1 October 2021.
If you would like more information on commercial and residential tenancies please contact Emma Humphreys, Laura Bushaway or your usual Charles Russell Speechlys contact. For more information on our Real Estate Disputes team click here.
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