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COVID-19 UK – Additional breathing space…but tenants who can pay should

Last week the government announced that:

  • the forfeiture moratorium is to be extended until 30th September 2020;
  • Commercial Rent Arrears Recovery (CRAR) can only be used where tenants owe at least 189 days of unpaid principal rent;
  • the draft Corporate Insolvency and Governance Bill has been amended, extending the temporary ban on the use of winding-up petitions where the inability to pay debts is caused by COVID-19, until 30 September 2020; and
  • a new voluntary Code of Practice has been introduced for commercial landlords and tenants to follow during the COVID-19 pandemic

Most commercial leases require the tenant to pay its rent quarterly, and invariably include a provision allowing the landlord to forfeit if that rent has been unpaid for a period of time, e.g. 7, 14 or 21 days.  Outside of the lease, a landlord would normally also have other tools at its disposal if a tenant is not paying its rent (such as CRAR or serving a statutory demand threatening winding-up proceedings).

The measures already introduced and proposed by the government, in response to the COVID-19 pandemic (see here for more information), limit landlords’ options when faced with a non-paying tenant. This has already resulted in many facing large arrears positions with reduced options for bringing tenants to the table to agree a sensible payment plan.  Given that the protections have now been extended to 30 September 2020, the squeeze on landlords looks set to continue.

On the same day as the government extended these protections, it also published its Code of Practice for commercial property relationships during the COVID-19 pandemic.  The Code is voluntary and sets out a number of principles which landlords and tenants ought to apply when dealing with each other on rent issues during the pandemic.  Signatories to the Code include the British Property Federation, the British Retail Consortium, REVO and RICS.

It is recognised that “both parties should act in good faith” and the foreword to the Code maintains that the government “has always been clear that tenants who are able to pay their rent in full should continue to do so”.  Therefore, although the Code encourages co-operation, it is clear that landlords are not being asked to agree concessions with businesses that, despite the COVID-19 pandemic, are able to pay their rent.

If a tenant can demonstrate it is experiencing “temporary severe hardship” as a result of the impact of the COVID-19 pandemic, it is suggested that landlords “should provide concessions where they reasonably can” and that new arrangements could be agreed between the parties including a “rent-free period”, a “deferral of the whole or part of the rent” or “rental variations to reduce ongoing payments to a current market rate”.

It will be interesting to see what impact this voluntary Code will actually have.  However, it’s worth noting that even in the absence of the Code, many landlords have already been proactively seeking to engage with tenants’ deferrals and, in certain circumstances, concessions in order to support tenants’ businesses, where possible.

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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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Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning