Commercial leases in a time of COVID-19 – Part 3

Insight

28.07.2020

In parts one and two of this series, we considered the uncertain position of commercial landlords following the Government’s emergency intervention and the general outlook for landlords in the light of the pandemic and the new protective measures for tenants.

Since March, we have seen established principles and practices in landlord and tenant law evolve on what often feels like a daily basis, and there remains much uncertainty in the UK commercial property investment market. Unsurprisingly, commercial landlords continue to protest that the balance of power is weighted too heavily in favour of their tenants.

In part three of this article, we address the most recent legal developments for landlord and tenant and review suggested Government and industry guidance and best practice.

Corporate Insolvency and Governance Act 2020 (CIGA)

CIGA came into force on 26 June 2020 and has brought with it both wide-ranging (if temporary) protection to struggling tenant businesses and a permanent hardening of the Government’s position on the use of the insolvency procedure by landlords to recover arrears. The key relevant provisions of CIGA can be summarised as follows:

Insolvency Processes

Winding-up petitions cannot be presented on or after 27 April 2020 based on a statutory demand served during the “relevant period” (1 March to 30 September 2020).
A petition based on an inability to pay debts cannot be presented by a creditor in the Relevant Period, unless the creditor has reasonable grounds for believing that: (i) coronavirus has not had a financial effect on the company; or (ii) the company’s inability to pay was not caused by the COVID-19 pandemic.
For petitions presented in the period between 27 April and 26 June 2020, the Court can make orders to restore the debtor’s position to what it was before the petition was presented if the creditor did not hold the necessary belief about the non-impact of COVID-19.
Winding-up orders which would not have been made had the legislation already come into force are rendered void.

The restrictions are extensive and for all practical purposes are likely to prevent almost any debt-based winding-up petitions being presented during the relevant period unless the debt(s) relied upon arose long before the COVID-19 crisis.

The Moratorium

CIGA introduces a new gateway moratorium for companies in financial difficulty. This permanent measure (the Insolvency Act 1986 is amended to give effect to it) affords breathing space to companies by way of the provision of a payment holiday. The categories of debt that will not benefit from the payment holiday include rent payable under any leases for the period of the moratorium, which will likely be payable on a daily basis (similar to the payment of rent during administration).

Once in place, the moratorium will restrict landlord remedies such as debt proceedings, forfeiture and CRAR. No insolvency proceedings may be instigated during the moratorium.

If approved, the moratorium will last for an initial period of 20 business days but can be extended by the directors of the company for another 20 business days. With creditor consent or a court order the moratorium may continue for a total period of a year (including the initial 20 business day period) or may continue for an unlimited period by court order.

Crucially, the moratorium allows the directors to stay in control, with an insolvency practitioner acting in the role of monitor. The monitor will ensure the company complies with the requirements and terms of the moratorium, and the monitor may terminate the moratorium if he thinks the company is unable to pay debts during the moratorium. It is widely considered that this strikes a good balance between the competing interests.

Coronavirus Act 2020

The Coronavirus Act 2020 (CA) came into force on 26 March 2020 providing relief to tenants crippled by the socio-economic impact of COVID-19. The CA has been updated by regulations and the following revisions should be noted:

Until 30 September 2020 (an extension from 30 June 2020) a landlord is prevented from forfeiting a commercial lease for non-payment of rent. A landlord has a right of forfeiture for any other breach or in the event that a non-breach trigger has arisen. During the period of suspension, a landlord will not be regarded as waiving its right to forfeit for non-payment of rent unless it expressly confirms such a waiver in writing.
Failure by the tenant to pay rent during the moratorium period is removed as a ground of objection by a landlord to a new tenancy under the Landlord and Tenant Act 1954.
The CA also restricts the use of Commercial Rent Arrears Recovery (CRAR) until 30 September 2020, unless an amount of at least 189 days’ rent is due and unpaid (previously this had been 90 days of unpaid rent).

Commercial Property Code of Practice

On 19 June 2020, the Government published the Commercial Property Code of Practice (the Code) in an attempt to address the balance of power between landlord and tenant so that “every part of the chain is supported”.

In preparing the Code, the Government worked closely with leading industry groups (including RICS), who have in turn endorsed the Code’s principles until at least 24 June 2021. The principal aim of the Code is to encourage landlords and tenants to commence dialogue with one another (or build on those discussions already taking place). The Code’s main principles include “transparency and collaboration” and “acting reasonably and responsibly”. Key suggestions include:

Landlords are spurred on to provide support to tenant businesses if they are able to do so (and are encouraged to consider agreements to split rent for the unoccupied period; payment plans over specified periods; and/or rent reductions in return for lease extensions).
Tenants are encouraged to be open about the financial impact COVID-19 has had on their businesses and share evidence of that with their landlord. Underpinning this is a suggestion that landlords who take the time to understand their tenants’ business and support their short-term pain are more likely to reap the rewards of maintaining a long-lasting relationship and security for their investment.
A clear time limit should be placed on any temporary arrangement, with a mechanism for extension if necessary. To offer a rent deferral for “the duration of the pandemic”, for example, is vague and does not account for a second wave or persistence of the virus.
The Code acknowledges there will be additional service costs in connection with operating a building that complies with new COVID-19 health and safety requirements and suggests that the frequency of service charge demands should be made over shorter periods to help tenants manage cashflow and outgoings.

It is yet to be seen whether the Code has any teeth in practice, and whether it truly gives parties the “clarity and re-assurance” it promised over rent payments. Also, it must be remembered that the Code is voluntary and temporary.

The Code can be accessed online on the Government’s webpage.

Where do we go from here?

Throughout the pandemic we have seen an encouraging number of open and transparent conversations between landlords and tenants. The Code, which in many ways seeks simply to capture what is best practice in asset management, should assist further in building on those discussions. Finding long-term solutions agreeable to both landlords and tenants, and managing the balance of what can be a difficult relationship during the best of times, remains as crucial as ever in helping the commercial property market to recover.

More than ever proactive asset management is likely to be rewarded and, at difficult times, there is much to be said for a return to first principles. We are seeing savvy investors closely monitoring their portfolios, to ensure that any concessions are documented and that they are well positioned to react swiftly in the event of a breach or if tenants’ circumstances change (for better or worse). An understanding of potential enforcement options is also key; even if it is only to better inform an analysis of the commercial position and to weigh the benefit of enforcement against cooperation – forewarned is forearmed.

It is likely that the effect of COVID-19 and the Government’s measures will be felt for a long time, and that this whole chapter will be a catalyst for lasting change (in the legal world and beyond). Against that backdrop, it is with some interest that the industry viewed the launch at the end of June by the British Property Federation of its roadmap to recovery – in the form of its paper “Building a Shared Recovery” (which can be found here). That document, which is ambitious in scope, contains a number of measures / recommendations, in the immediate and long terms, including:

A temporary relaxing of Sunday trading hours
A furloughed space grant scheme
A high street “use” for planning purposes
Wider use of Local Development Orders
A temporary reduction or removal of SDLT on some commercial property transactions
Business rates reform
Community Improvement Districts
Entrepreneurs Space Rebate
Town Centre Investment Zones.

Which (if any) of these recommendations the Government will adopt remains to be seen. What is clear, however, is that collaboration and vision will be required, at both macro and micro levels; and that any necessary steps must be taken by all key stakeholders to ensure that proper support is put in place to encourage the growth and prosperity of this stalwart of the UK economy.

If you require further information about anything covered in this briefing, please contact Mark Gauguier, Siobhan Jones, Hayley Wilson or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.