Landlords and tenants: update on current arrangements

Published by James Hopkirk on 2 April 2020

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Last updated 27 April 2020

Businesses, particularly retail and hospitality businesses, are facing an extraordinary trading landscape. This landscape will have undoubtedly started to impact certain businesses’ ability to meet their rent obligations. Following on from the government’s previous moves to restrict landlords from evicting commercial tenants for breaches of rental covenants, further protections for tenants are now being introduced.  If the relevant legislation is passed, landlords will no longer be able to issue statutory demands or winding up petitions on the basis of non-payment of rent, and will also be prevented from using Commercial Rent Arrears Recovery (CRAR) notices (the usual precursor to bailiff action), unless the rent liability has been outstanding for more than 90 days. It is intended that these restrictions will be in place until at least 30 June and they will likely be a welcome relief for businesses who are considering restructuring options as a result of the measures introduced to combat the COVID-19 pandemic.

Whilst these protections will be welcomed by tenants, it is important that tenants communicate and work with their landlords if they are struggling to meet their obligations. We discuss further advice on this and other measures to consider below. Furthermore, tenants should also continue to make rental payments where they can afford to do so. The government has stressed that these measures are being introduced to protect tenants who, because of the pandemic, are unable to make rental payments, and that tenants who can afford to pay should do so. It’s also crucial that businesses are aware that, while landlords are to be restricted from using many of their normal courses of action for non-payment of rent for a certain period of time, the actual rental liability itself is not extinguished.

So, what should landlords and their tenants do if they believe they will be unable to continue to meet their rent payments?

1. (Still) Don’t panic, communicate

Businesses are now starting to see the results of the Government’s measures to support businesses come through, which is hopefully providing a bit of extra breathing space and assistance to cash-flow. If this is not the case, and if businesses haven’t already, then it’s important that they open a dialogue with their landlord.

A long-standing tenant with a strong rental covenant is an asset to a landlord. It seems counter intuitive that they would want to evict a such a tenant, particularly if they know that the business holds promise once more normal trading conditions return. Landlords will recognise that the current landscape does not lend itself to finding new tenants.

The British Property Federation which represents landlords has said “…the commercial property industry is committed to supporting its customers who are concerned, through no fault of their own but due to coronavirus, about rent liabilities. Businesses will have immediate relief measures available to them – flexibility around rents and other lease terms could include moving from quarterly to monthly rent payments and providing rent deferrals or payment holidays, depending on individual business’ financial circumstances”.

Landlords and tenants can often reach agreement by being open and honest with each other.

2. Rent holiday

Explore the possibility of a three or six-month rent reduction or holiday. A landlord may see this as a desirable option if it improves the prospect of a trusted tenant seeing out the remainder of their lease. As above, the landlord is unlikely to be able to take enforcement action even if it was inclined to do so.

If a rent holiday is not an option, a business should look at the liabilities it is facing as a whole and, together with a professional advisor, develop a plan to make its cashflow last as long as possible.

Directors must be mindful of their duty to creditors as a whole if the business gets into difficulty.  However, in some circumstances, paying the rent even when other creditors can’t be paid might be a sensible option to safeguard the future of a business, which will of course be critical in ensuring that all suppliers and creditors are eventually paid in full.

Each situation needs to be assessed on its commercial merits.

3. Review regularly

Rent should not be seen in isolation of other financial obligations. Yes, the picture may look bleak and the rent may be seen as the most pressing liability but take a deep breath and speak first to the team at Kreston Reeves who can help review the current position. Do not rush into insolvency arrangements. The situation is changing on a daily basis with new challenges and also new messages of support from the Government. Businesses should take the time to consider how these challenges impact their overall strategy and adapt this where necessary.

In these unprecedented times, it clear that the Government is taking every step to safeguard the economy. We are optimistic that through communication and understanding, good businesses and their landlords will be able to come through the current difficulties and thrive again in the future.

For further information and guidance, please get in touch with your usual Kreston Reeves contact or contact me here.

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