17 April 2020

Note for landlords of commercial properties- particular points re rent recovery from tenants in current market conditions

Many tenants (particular those in the retail and hospitality sectors- but also a considerable number of office and industrial tenants) are not paying their rent in full or, in many cases, at all. Some of these tenants are major companies (such as JD Sports and WH Smith) who one would think could afford to pay. According to press reports, only 48% of commercial rents had been paid for the March 2020 quarter by the start of April.

Some landlords (such as Grosvenor and Cadogan and Argent) are granting rent holidays and many are allowing monthly or delayed payments. The press have reported that Hammerson only received 37% of their rent for the March quarter by the end of March 2020 (with Workspace reportedly only receiving 50% and LandSec 65%).

Some landlords, and probably all, are seeking to limit or reduce service charge expenditure- major works, in particular, are likely to be substantially delayed and savings made elsewhere.

Forfeiture of a Lease is not allowed until at least 30 June 2020. The government has the power to extend this time period further.

An effective way to recover rent from a corporate tenant who is refusing to pay, or to agree to acceptable phased payments, is to threaten or pursue Winding Up Proceedings. Landlords such as Criterion Capital and Sykes Capital are understood to be deploying this approach.

If agreement is reached with a tenant to suspend or commute the rent, it is vital this is properly documented to achieve certainty- especially if there is a Guarantor or it could affect the validity of a break notice (where the notice is conditional on all rents being paid) or be relied on in a rent review.

If there are former tenants or guarantors who are still liable for the rent, landlords should ensure they serve their statutory notices under section 17 of the Landlord and Tenant (Covenants) 1995 without delay so as to preserve their right to recover unpaid rents from those parties (and hopefully secure payment from them if the tenant cannot pay).

Where a tenant is in Administration (such as Debenhams, Cath Kidston, Carluccio's, Oasis or Warehouse) rent can still be recovered from the Administrator as an expense of the administration provided, and so long as, the premises are being used for the benefit of the Administration (even if they are currently not trading therefrom). This means that the Administrators must pay the landlord the rent before making payments to most other classes of creditors. Administrators though, will no doubt be arguing that rent is not payable for premises that are not trading at present.

Recovering rent through distress (i.e. CRAR) is difficult not just because many premises are locked or can't be accessed safely but also because much retail stock has not been paid for by the tenant and still belongs to the supplier.

Some tenants have business interruption insurance and the building insurance may also possibly cover Covid 19. However, insurers as a whole have seemingly been very reluctant to date to accept any liability although they are now coming under increased pressure from the Government to do so. Before agreeing concessions with any tenant, it is wise to check if they have any insurance cover that would help meet the rent liability.

On Lease renewals under the Landlord and Tenant Act 1954 ("the Act"), the rent is determined at the court hearing if not agreed and such rent will reflect the market rent at that time. So, if the market is likely to fall substantially, tenants will want to delay renewal to take full advantage of the fall. Landlords may want to delay serving Section 25 Notices until the market improves (but tenants will no doubt take the initiative by serving Section 26 Requests to seek lower rents).

Where the contractual term of a protected business lease expires, the lease will only continue under the Act if the tenant is in business occupation. So, if the tenant has ceased trading due to the virus but left its goods at the premises (and not returned the keys), there will be an issue as to whether it is still in business occupation or not and whether, accordingly, the lease has continued or ended?

Rents on rent reviews are usually based on market rents as of the date of the review. There is an assumption of a willing tenant and landlord so a tenant cannot argue no one would take a letting of the premises.

In relation to dilapidations claims, loss of rent for the current period is unlikely to be recoverable given the inability to view properties and the lack of demand. Similar considerations may apply to any statutory valuation for the purposes of a dilapidations claim (i.e. any diminution in value will depend on what the future holds for the premises). In circumstances where redevelopment may no longer be pursued, there is likely to be more claims based on the landlord actually having to undertake the repairs and reinstatement.

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