Landlord and tenant: the battle for rent

These are extremely difficult times for commercial landlords and tenants alike as a result of Covid-19 – particularly for those in the retail, hospitality and entertainment sectors. Many offices are also standing empty, and will be empty for quite some time to come. There has been substantial default in relation to payment of rents for the March quarter, and it is anticipated that there will be greater default in the next quarter commencing on 24 June 2020 (many tenants had already paid their March quarter rent when lockdown commenced on 23 March 2020). Some of the major tenants are failing or refusing to pay their rents, in whole or in part. Major property companies such as British Land have reported much-reduced income, and shopping centre operators such as Hammerson and intu in particular have suffered. Their property managers have been working day and night to reach agreements with tenants who can’t or won’t pay. Lawyers have also been working furiously on side letters dealing with deferral of rent or rent holidays, or on deeds of variation extending the term of leases in return for a rent break. Tenants are, naturally, concerned at having to pay rents for premises they cannot occupy or from which they cannot trade profitably due to social distancing requirements. Unfortunately for tenants, their leases require them to pay the rent notwithstanding as their rent cessor provisions are only triggered by physical damage to their premises, which makes them unfit for occupation. Building insurance, therefore, provides the tenants with no protection and, as set out below, there is substantial uncertainty as to whether business interruption policies cover economic loss caused by Covid-19. Some tenants have sought to raise legal arguments on the basis of force majeure or illegality to occupy in order to seek rent suspensions, and others have claimed that their leases have been frustrated, but the very fact that the government has had to introduce draconian measures to protect tenants from action speaks loudly as to the lack of merit of any defence to legal liability. The inability to trade has caused substantial cash flow difficulties despite the government’s financial assistance in relation to rates, VAT and furloughing of staff. But for tenants experiencing a temporary shortage of funds, there are various loans now available (see below). Throughout, the government has been urging landlords and tenants to co-operate, but this has not been easy in circumstances where tenants are reluctant to disclose their true financial position or consider that withholding the rent is their best bargaining tool. Many landlords have been generous in offering rent concessions, but others are not so financially able to do so and remain concerned that, if they don’t take action, other creditors will secure priority or the tenant will go into insolvency. Current position Following the publication of the Corporate Insolvency and Governance Bill on 20 May 2020, the government issued a press release on 29 May announcing its intention to introduce a code of practice by 24 June to provide landlords and high street business tenants with clarity and reassurance over rent payments. These initiatives follow the passing of legislation: a) preventing forfeiture of any commercial lease up to 30 June 2020; and b) preventing the exercise of commercial rent arrears recovery (CRAR) for less than 90 days’ rent. A working group has been established to develop the code in the joint interests of landlords and tenants. It has already begun discussions given the urgency. It is expected that, even though retail tenants can commence business from 15 June 2020, many will use such funds as they have to recommence trading rather than pay their rent. Retailers such as Debenhams and Cath Kidston, and restaurants such as Carluccio’s and Café Rouge, have, of course, already gone into administration, and many more will possibly take this route or seek to enter a company voluntary arrangement (such as Travelodge) in due course. The Bill and the code Pursuant to the Bill, there will be an effective ban on winding-up proceedings being used to collect rent until at least July 2020, and tenants in financial difficulty will be able to enter into payment moratoriums (supervised by a licensed insolvency practitioner) to allow time to save themselves as going concerns. The first reading of the Bill in parliament was on 3 June, and assuming it is passed shortly with no major amendment, the current and future position as to rent collection from high street tenants, with particular focus on the June quarter, is as follows: 1. Much will depend on what the code eventually provides. It is proposed to be voluntary, at least to begin with, and to provide a framework for landlords to work with tenants who claim they cannot pay in order to find some middle ground – possibly through mediation. Tenants who can pay, whether from their own resources or the various loans being made available, will not be protected by the code, and tenants who claim not to be able to pay are expected to provide landlords with their relevant financial documentation to substantiate such inability. Substantial landlords who can afford to give tenants some much-needed breathing space or concessions are expected to do so. 2. Given that the code is intended to be voluntary, it is anticipated that, to force landlords to follow the code, the government will have to extend the restrictions on forfeiture, CRAR and winding up for, at least, high street tenants. But if this is the case, then it is questionable what real purpose the code will serve as landlords’ hands will be effectively tied anyway. 3. However, there is still no restriction on landlords simply issuing debt proceedings to recover sums outstanding, costs and interest. But this may take some time if the tenant seeks to raise a defence or applies for a stay of execution of the judgment for the arrears to allow it further time to pay. However, the code will put pressure on landlords not to take any action unless it is really necessary and appropriate, and the fear is that tenants will use the code to delay any such action. Mediation is, of course, voluntary and may be used simply to delay matters further. Expert determination may be a better alternative to ensure certainty and save time. 4. While many tenants are clearly unable to pay, their financial position is often very unclear to landlords because tenants: a) often refuse to provide confidential financial information. b) can and have been seeking loans under the various government schemes (and the government has made clear that loans can be used to pay rents). Latest figures in relation to loans to all businesses across the board show that: i) £21.3bn has been lent under the Bounce Back Loan Scheme (ie loans from £2,000-£50,000). ii) £8.9bn has been lent under the Coronavirus Business Interruption Loan Scheme (ie loans for companies with turnover of less than £45m). iii) £1.1bn has been lent under the Coronavirus Large Business Interruption Loan Scheme (ie for companies with turnover in excess of £45m). iv) £16.2bn is currently being lent under the Covid Corporate Financing Facility, including to InterContinental Hotels (£600m), John Lewis (£300m), Marks & Spencer (£260m) and Greggs (£150m). c) Various tenants are claiming to be insured under business interruption policies in relation to “notified diseases” clauses (which Covid-19 is), government action or just loss of rent but are having to do battle with their insurers to establish whether they are covered. The Financial Conduct Authority issued proceedings on 9 June – with the assistance of eight insurers – to test the wording of 17 different sample policies which tenants claim do provide cover for Covid-19 but which insurers claim do not. The High Court will hear the case in an eight-day trial starting on 20 July 2020. 5. Many landlords have already granted tenants concessions or deferrals (often in return for the tenant extending the lease or waiving a right to break). However, given that some landlords are apparently insured for loss of rent under their building insurance policies, those that have some cover have to be careful about waiving any rent and not actively pursuing recovery to mitigate their loss. What’s next? The position is very uncertain until the Bill is passed, the code is published and the government makes clear whether it will further restrict enforcement action by way of forfeiture, CRAR or winding up. On 2 June in Re: A Company (Injunction to restrain presentation of petition) [2020] EWHC 1406 (Ch), the High Court granted an injunction to a high street retailer to prevent its landlord from pursuing a petition pending the Bill’s introduction. For the most part, landlords need to be reassured that tenants really can’t pay (especially the large retailers), other landlords and creditors are not receiving preferential treatment, and that they will not be prejudiced by delaying action through the tenant going into a CVA or administration without having made any substantial payment beforehand. Hopefully, helped by the code and their representative bodies, landlords and tenants can reach some accord, and property managers can have a day off,  but this will need substantial disclosure and trust, and a recognition that this is all part of the bigger picture as to the rental market going forward into a new age. Jonathan Ross is a partner at Forsters LLP