The Impact of COVID-19 on Commercial Landlords and Tenants and their Lease Obligations

Rent Payment Obligations

A decision by a Tenant to withhold rent (or any part of it) constitutes a breach of covenant/term of the lease. However, the reason for the non- payment of rent needs to be considered as does the resulting actions by the landlord.

The decision in the case in which we represented the tenant above means that landlords cannot enforce the strict terms of a lease without considering the terms of the legislation and/or the current circumstances of the COVID-19 pandemic.

What Remedies are available to landlords where a tenant ceases to pay rent?

A landlord needs to be aware of the advice above, however in general terms and depending on the terms of the lease, the landlord has a number of legal remedies open to it to enforce a breach of covenant:

1. A charge of interest on arrears (including rent, service charge and insurance) from the due date for payment until the payments are made. Usually a grace period of between 7-21 days is given before interest is charged but this will be backdated to the date the payment was due;
2. Call in any security including guarantees or rental deposit;
3. An action for recovery of arrears of rent plus interest. A landlord has six years to bring an action for non-payment of rent;
4. Forfeit the lease. Most commercial leases contain a forfeiture clause entitling a Landlord to forfeit a lease and re-enter the premises for non-payment of rent (whether demanded or not) usually after a grace period of between 7 to 14 days.
5. Seek to wind-up a company tenant under the Companies Act 2014 due to an inability to pay debts or serve a bankruptcy petition in the case of an individual.

However, any action by the landlord in seeking to forfeit the lease or take any action for the recovery of arrears of rent for example, needs to be balanced with the current circumstances and the general sense at the moment is that such an action would probably not succeed. Therefore, engagement with the tenant, who must also act reasonably, is the more prudent course of action.

What options do you have as a tenant?

In the absence of government intervention, the Tenant will need to negotiate directly with the landlord to agree a reasonable workable temporary solution. The interests of the Landlord and the Tenant will need to be balanced. It will all rest upon the ability of the Tenant to pay the rent. The business sector the tenant is operating in and the tenant’s business will be considerations here. If the Tenant has an online presence or is still open for business (albeit in a limited manner), there may still be some revenue coming in. The financial strength of the Landlord is another consideration and whether it has debt. For institutional landlords or landlords who own their properties, cash flow may not be an issue for them in the short term and they may be able to agree temporary concessions with a tenant. Where the landlord has debt, this will depend on the approach of their financial institutions, and whether the benefit of a mortgage payment holiday can be passed on to the Tenant. This however will result increased loan repayments for the Landlord when the crisis ends, which could be backed into higher rent payments for the tenant when the crisis ends.

What happens if the Landlord seeks to forfeit the Lease?

As in the case above, the Tenant will need to apply for equitable relief against forfeiture if the landlord tries to re-enter. In the case of non-payment of rent, a prior formal demand need not be given by the Landlord where the Lease has expressly excluded this requirement.

The court has wide discretion to grant relief from forfeiture and has tended to lean against forfeiture in the past. A court assesses each case on its own merits and will depend on facts of each case. The courts have said that a very strong case for refusal of relief would be required where forfeiture is based solely on non-payment of a sum of money and where forfeiture is being used as a tool to secure payment of that money, and no damage has resulted from the delay in payment or such damage can be compensated by the payment of interest plus costs. The tenant would still be liable to pay all arrears of rent plus interest to the landlord and often relief against forfeiture is granted on these terms plus costs.

In general, the terms of the Lease will still apply as between the Landlord and the Tenant, however, the circumstances of each case need to be considered.
It was successfully argued in the high court, that under the terms of a lease for the premises and the emergency measures introduced by the Government in response to the Covid-19 crisis an alleged eviction by a landlord was not permissible. The circumstances of the case have been widely reported however the actions of the landlord including preventing access, amounted to an eviction due to non payment of rent which is not permitted.

The court will also look at the commercial realities of the situation, particularly where the landlord and tenant are on equal terms, in deciding whether to exercise its discretion to grant relief against forfeiture. Injustice may be caused to the owner of a shopping centre by a tenant who does not pay rent and service charges. Landlords have their own financial commitments. Relief has been refused in the past where there have been deliberate breaches of covenant and non-payment of rent and service charges which would jeopardise the economics of a development as a whole. In another case, however the court viewed the forfeiture of a commercial lease as ‘extreme’ in the circumstances and as one which might destroy jobs.

Conclusion

It is recommended that legal advice is taken in relation to the terms of a commercial Lease. For further information or advice, contact us today on: 01 663 2000