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Rent timebomb: Warning as moratorium on forfeiture for commercial leases is about to end

Posted: 15/06/20 by Howes Percival

Rent timebomb: Warning as moratorium on forfeiture for commercial leases is about to end

As the three-month block on the repossession of commercial leases for non-payment of rent ends on 30 June 2020, Howes Percival urges dialogue between landlords and tenants to agree alternative payment plans.

As part of the emergency Coronavirus Bill, the government announced a three-month ‘forfeiture moratorium’ on commercial leases for non-payment of rent due to the pandemic. With the moratorium ending on 1 July 2020, Howes Percival is urging landlords and tenants to re-negotiate lease terms or agree alternative payment arrangements.

In England and Wales, commercial rent is normally payable quarterly in advance, with the next due date 24 June. As more retail premises begin to reopen on 15 June 2020, rent demands are likely to increase, unless the government extends the moratorium.

Simon Murphy (pictured here), a partner and property law expert at Howes Percival explained: “In March, the government ordered a three-month ban on the repossession of commercial leases for non-payment of rent. The moratorium effectively froze time on a landlord’s right to repossession for non-payment of rent until 30 June 2020. But this was a short-term relief for tenants - landlords still have the right to recover the rent owed or claim for forfeiture after the moratorium ends.

“Unless the government extends the provisions, from 1 July 2020 tenants will no-longer be protected from forfeiture for non-payment of rent. Undoubtably, many landlords and tenants are struggling financially because of the lockdown - but it’s in everyone’s interests to keep lines of communication open and find a way of surviving the uncertain times we find ourselves in.”

The public health restrictions imposed by the government to combat the COVID-19 pandemic have impacted thousands of businesses over the previous three months. Restaurants, pubs, leisure premises and businesses deemed non-essential have been closed to members of the public.

Section 82 of the Coronavirus Act 2020 introduced provisions protecting businesses, and ultimately the economy, by prohibiting landlords from enforcing rights of forfeiture for non-payment of rent. Government guidance has confirmed that rent includes all sums due under a lease.

This has protected businesses from some of the consequences of failing to meet rent liabilities during a period of forced closure and loss of income. However, a tenant’s obligation to pay rent has not been waived nor even suspended by the Act; the debt remains. The reduction or suspension of rent is usually limited to damage or destruction of the demised premises by an insured risk. COVID-19 does not engage these provisions. Accordingly, landlords remain entitled to rent in full.

Rent demands are likely to increase as non-essential retail premises reopen to the public on 15 June 2020. The return of a tenant’s income stream may invite landlords to begin conversations about the payment of outstanding rent.

For many tenants paying their rent quarterly, rent will fall due on 24 June. It is unlikely that previously unpaid rent will have been met by this date. Most leases will provide the tenant with a grace period (usually 14 or 21 days) to pay the rent which has fallen due. However, the moratorium on forfeiture is relevant to the period between 26 March and 30 June 2020 only. From 1 July 2020, landlords will no longer be prevented from exercising forfeiture for the non-payment of rent.

Simon Murphy continued: “Whilst the Act provides scope for the moratorium to be extended, many tenants will currently be exposed to losing their business premises. Retail businesses are unlikely to have available income to repay all rent debts within three weeks of reopening. Indeed, most pubs and restaurants will not be serving the public by 1 July. It remains to be seen if the government will extend the moratorium to help these vulnerable businesses.

“The current economic climate does not suggest that landlords will easily find alternative occupiers. Determining leases may also expose landlords to business rates and service charge liabilities that a tenant would otherwise meet. Keeping a non-paying tenant in situ may well make much more commercial sense for a Landlord in this market. With this in mind, landlords may prefer to agree rent repayment plans with tenants to at least get some money in.”

The government has also introduced legislation to prevent winding up petitions being presented and orders to wind up companies being made where the debt relates to a tenant’s inability to pay the rent as a result of the pandemic. When the new bill becomes law, the Commercial Rent Arrears Recovery procedure is also prohibited unless 90 days of rent is owed.

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