Forfeiture of Commercial Leases and Covid-19
Posted on 5th May, 2020

In response to the recent Covid-19 outbreak, a brief respite has been provided to commercial tenants by virtue of section 82 of the Coronavirus Act 2020 (CVA 2020) which prevents landlords of commercial leases from forfeiting the lease as a result of unpaid rent during the UK lockdown. However, it seems that commercial tenants may not be as protected as they would hope. This article looks at the limitations behind this new legislation and the long term problems which may still arise.

Tenant Protection

The protection provided to commercial tenants under s82 of the CVA 2020 is limited to tenancies to which Part 2 of the Landlord and Tenant Act 1954 applies (s82(12)(a) CVA2020). This will generally apply to most commercial leases and agreements for lease.

Under most commercial leases, if rent is unpaid for a specified period of time (usually 21 days), then the landlord would be able to exercise their right of forfeiture and bring the lease to an end. However, to ensure that commercial tenants are provided some protection during the UK lockdown, section 82(1)-(12) of the CVA 2020 restricts commercial landlords from being able to forfeit a lease during the ‘relevant period’. The ‘relevant period’ is defined under the CVA 2020 as beginning with the day after the day on which the CVA 2020 is passed (26 March 2020) and ending on 30 June 2020. However, extension of this period is built in to the legislation. What this means in practice is that if any rent (including other lease payments, such as service charge or insurance payments) is unpaid during the ‘relevant period’, then the landlord will not be able to forfeit the lease during that time.

Limitations

Tenants must be aware that this measure is not a ‘rent free period’ as the landlord’s right to forfeit the lease due to the non-payment of rent will still be enforceable once the ‘relevant period’ has expired.

This may cause concern for tenants, and they should make preparations to ensure that they are able to pay rent when it falls due after the expiration of the ‘relevant period’. Furthermore, tenants not making rent payments during the ‘relevant period’ should consider that unpaid rent is likely to attract interest at the rate specified in the lease; which will still be incurred and accumulate throughout the ‘relevant period’.

A further limitation of the CVA 2020 is that the landlord is not prevented from enforcing a right of re-entry for a breach of other covenants under the lease. The landlord could therefore feasibly still forfeit, by way of peaceable re-entry, for breaches other than the non-payment of rent. However, the landlord should consider the tenant’s ability to remedy a breach during the COVID-19 outbreak when calculating what a reasonable period of time is for the tenant to remedy a breach.

Practical Considerations

An important point for the tenant to consider during the ‘relevant period’ is that they should express to the landlord their intention to use the premises again, once the restrictions relating to Covid-19 are lifted. This is to ensure that tenants are still deemed to be in business occupation even when they have vacated the premises and are unable to use the premises as a result of COVID-19 (Morrisons Holdings Ltd v Manders Property (Wolverhampton) Ltd [1976] 2 All E.R. 205).

Similarly, the landlord should ensure that they do not inadvertently provide an express waiver to rent payments. This is despite the legislation which provides that no conduct by or on behalf of the landlord during the ‘relevant period’ will be taken to waive the right to forfeit for non-payment of rent (section 82(2), CVA 2020). In providing an express waiver of rent payments, the landlord may find it difficult to request further payments for arrears after the UK lockdown and may have difficulties forfeiting the lease for non-payment.

In these uncertain times, it seems that commercial tenants may not have the relief that they might have hoped for under the CVA 2020. In practice, landlords may request settlement of arrears after the ‘relevant period’ which could severely damage many businesses. Failure to pay these arrears and any interest may lead to the landlord exercising their right to forfeit the lease. Of course, landlords will have to consider the novel commercial circumstances in deciding how to request and enforce rent payments. After all, the landlord may be having to choose between a tenanted property at a lower rent or a vacant property with little prospect of finding a new tenant.

If you are a landlord or tenant of commercial property, and have any questions, please get in touch with James Cleveland or Cameron Evans-Grainger.

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