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UK COVID-19: Update on protection from forfeiture for commercial tenants

Avid readers will have seen our previous blog on the government’s proposals to protect commercial tenants from the risk of forfeiture for non-payment of rent, as a result of COVID-19.

The proposals were incorporated into section 82 of the Coronavirus Act 2020 (the Act), which came into force on 25 March 2020.  In particular, section 82(1) of the Act provides that:

“A right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period.”

Unfortunately the Act left a number of questions unanswered.

In response to requests for clarification from the Property Litigation Association, the Ministry of Housing, Communities and Local Government (MHCLG) has provided some guidance on the aims and objectives of section 82 of the Act.  These include:

• What is meant by “rent”? 

MHCLG has made clear that for the purposes of the forfeiture moratorium “rent” is meant to include “any sum” a tenant is liable to pay under a business tenancy, including, it seems, service charge, insurance and other sums as well as principal rent.

• What is meant by “business tenancy”?

MHCLG has confirmed that the objective of the legislation is for the moratorium to cover “all commercial leases with someone in occupation of the premises for the purposes of their business”.

This is meant to include leases where the tenant in question has sublet the premises, and so is no longer in occupation, but a subtenant is in occupation of at least part of the premises for the purposes of their business.  In such circumstances, the sublease and the superior lease will both benefit from the forfeiture moratorium.

Following the same logic, the forfeiture moratorium would not, however, appear to extend to the head leaseholder of a build-to-rent residential building.  That is because such premises would be occupied by sub-tenants for residential purposes, rather than for the purposes of their business.  It’s worth bearing in mind that there are additional hurdles and complications to consider when forfeiting a lease with residential parts.

• What about consensual forfeitures? 

Unfortunately MHCLG has not given a clear indication that consensual forfeitures are excluded from the ambit of the Act.  MHCLG stated:

“Whether express agreement to forfeit the lease for non-payment of rent amounts to enforcement by action or otherwise of a right of re-entry or forfeiture will depend on the facts of a given case”.

The result of this is that the legislation appears to prohibit consensual forfeitures.  This suggests that landlords would have to agree surrenders with administrators of insolvent tenants or to rely on alternative grounds for forfeiture.

MHCLG’s responses, although not legally binding, have provided some helpful guidance for landlords and tenants of commercial premises; however, it is clear that the Act has some unsatisfactory consequences which for the present time landlords and tenants will need to adapt to. These include the apparent prohibition on consensual forfeitures, and the fact that landlords are not only prevented from enforcing payment of their rental income from property by forfeiture, but also recovery of their actual expenditure to keep the building safe, secure, well maintained and insured.

As set out in our previous blog, landlords remain free to enforce non-payment by other means, including (in the case of rent) by way of the Commercial Rent Arrears Recovery regime, or by winding up proceedings.  However, MHCLG has made clear that it is “monitoring the enforcement of non-payment closely and is keeping this issue under review”.  Therefore, if landlords do attempt to enforce non-payment of rent by other means, it may be the case that further action is taken by the government to protect commercial tenants.

The PLA’s questions and MHCLG’s responses can be read in full here.

 

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

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