Covid-19 Lockdown – Landlord and Tenant Showdown

Apr 9, 2020 | Commercial property

Many tenants have not paid their 25 March 2020 quarter’s rent. The scene is now set for a dog fight between landlords and tenants.

In this article, we give some guidance as to what both landlords and tenants should be thinking about.

THE LEGAL BASIS FOR THE LOCKDOWN

First, it is important to understand the legal basis of the lockdown. The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (‘Covid Regulations’) came into force on 26 March 2020. The regulations impose various restrictions:

  1. Businesses (food and drink) which must close during the emergency period, except for the purpose of selling take away food. This includes all restaurants, cafes, bars and pubs.
  2. Businesses which must close with no exceptions. This includes, cinemas, theatres, nightclubs, bingo halls, concert halls, casinos, betting shops, spas, nail/beauty/hair salons and barbers, massage parlours, indoor fitness studios/gyms, bowling alleys, amusement arcades, indoor leisure centres, car showrooms, and the list goes on.
  3. Restrictions on Movement. No person may leave their home without reasonable excuse i.e.
    1. a. to obtain necessities including food and medicine,
    2. b. to take exercise,
    3. c. to seek medical assistance, or
    4. d. to travel for work where it is not reasonably possible for the person to work from home.

It is a criminal offence to breach these restrictions.

The Secretary of State must review the restrictions every 21 days, the first review to be carried out on 16 April 2020.

WHAT SHOULD THE OCCUPIERS DO ABOUT RATES?

Business Rates Holiday

If the occupier is in the Retail, Hospitality or Leisure business or a Child Nursery, the occupier is entitled to a rates holiday for 2020/21. All the local authorities should reissue the relevant rates bills.

  1. Retail includes all types of shops: opticians, post offices, car showrooms, petrol stations, garden centres, hairdressers, beauty salons, nail bars, travel agents, dry cleaners, letting agents, estate agents.
  2. Hospitality includes restaurants, café’s, sandwich shops, pubs, bars, takeaways, live music venues.
  3. Leisure includes: cinemas, hotels, nightclubs, gyms, casinos, sports clubs, etc.
  • Sectors that do not qualify include:
    • medical services
    • professional services
    • financial services
    • educational institutions
    • manufacturing

Other Rates Exemptions

Under the Local Government Finance Act 1988, section 45, unoccupied property is generally liable to rates. However, pursuant to the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, certain premises are exempt including:

  1. If the owner is prohibited by law from occupying it or allowing it to be occupied.
  2. The premises are kept vacant by reason of action taken by or on behalf of the Crown or any local or public authority with a view to prohibiting its occupation.

We therefore believe that where a business is not automatically entitled to a rates holidays, it may nevertheless be exempt from rates by reason of occupation being unlawful.

CASH GRANTS

Certain businesses  will be entitled to cash grants:

  1. £10,000. Businesses that qualify for a rates holiday and have a rateable value of up to £15,000.
  2. £25,000. Businesses that qualify for a rates holiday and have a rateable value of over £15,000 but less than £51,000.

IS THE TENANT LEGALLY ENTITLED TO WITHHOLD RENT?

A party can be excused from performing its obligations under a contract, such as a lease or tenancy agreement, if: (1) there is a ‘force majeure’ clause; (2) the contract is ‘frustrated’; or (3) the performance becomes illegal:

  1. Force Majeure. Most leases/tenancies will not have a force majeure clause, but it is worth double checking.
  2. Frustration. This is unlikely to apply to most longer-term leases / tenancies. However, case law does suggest that, where circumstances render it difficult or impossible for a landlord or tenant to carry out its obligations, there would be a defence to a claim for breach.
  3. Illegality. Case law also suggests that where there is temporary illegality, the operation of a contract may be suspended.

Under the Covid Regulations, as described above, it is illegal to operate many businesses. In our view, it is therefore arguable that the obligation to pay rent is suspended during the Covid lockdown.

SO, WHAT SHOULD YOU DO IF YOU ARE A TENANT?

  1. Rates. If you are entitled to a rates holiday, obviously do not pay. If not, consider whether you can argue you are exempt on the basis that it is unlawful to occupy the premises.
  2. Cash Grants. Apply for the cash grants assuming that you are entitled.
  3. Other Financial Assistance. The Government has proposed various schemes to help all businesses including: the Employee Job Retention (or Furlough) Scheme; Self-Employed Grants; Tax and VAT Deferral and Time to Pay Schemes; and the Coronavirus Business Interruption Loan Scheme. These schemes are beyond the scope of this article, but should be investigated by tenants.
  4. Rent. Engage with your landlord and see if your landlord is willing to suspend your rent payments on the grounds described above. Bear in mind that under the Coronavirus Act 2020, no business will be forced out of their premises if they miss a rent payment over the next three months. This is likely to apply until 30 June 2020 but could be extended.

WHAT SHOULD YOU DO IF YOU ARE A LANDLORD?

  1. Mortgage Payment Holiday. The Government has placed all banks under pressure to agree mortgage payment holidays for at least 3 months. Many commercial lenders are offering 6 months capital repayment holidays. If your property is mortgaged, in order to preserve your cash flow and mitigate the effects of non-payment of rent by tenants, consider seeking a mortgage payment holiday from your lender.
  2. Engage with your Tenant. Advise your tenants and/or encourage them to take advantage of the rates holidays, possible rates exemption, cash grants and other financial assistance available, so that their business is more likely to survive, and they can afford to pay you rent.
  3. Other Financial Assistance. Some of Government schemes that may be available to tenants may also equally be available to landlords.
  4. Consider Legal Action. Your tenant may bluntly refuse to pay the rent. The legal arguments raised above in favour of rent being suspended are by no means clear cut or bound to succeed. Although you cannot forfeit the lease or force the tenant out, at least until 30 June 2020, you can still sue or serve a statutory demand for the rent.
  5. Come to an Arrangement with your Tenant. Your tenant may seek some form of concession from you. Landlords should advance the commercial, moral and legal case for rent not being suspended or waived altogether. Landlord and tenants are in it together and there may be a good long-term case for sharing the pain. Ultimately, landlords may be willing to agree a deferment, monthly (as opposed to quarterly) payments, or some other concession. Please see our separate article on factors the landlord should consider. Landlords should ensure that they do not unintentionally vary the lease or tenancy or waive their rights, and that any arrangement is committed to writing.

WE ARE HERE TO HELP

Whether you are a landlord or a tenant, we are happy to help you in dealing with your rent and rates issues, applying for grants, or negotiating with lenders. Please do not hesitate to contact a member of our team at any time for a free initial consultation.