*Updated* FAQs during Covid-19, for landlords and tenants
Some of your questions answered.
**This article has been updated since its first publication on the 6th April 2020 due to the extension by the Government of some of the measures put in place to deal with the ongoing pandemic.**
The COVID-19 pandemic has the whole world reeling with the impact being felt on every level. Amongst the challenges faced by all of us, landlords and tenants are facing unparalleled difficulties in light of the social distancing measures in place; retail and leisure premises have been forced to close and offices are all but empty. Tenants of both residential and commercial premises are naturally concerned about meeting their financial obligations and billions of pounds of rent went unpaid on the March quarter day. Landlords and tenants are understandably confused as to what rights and remedies they have and it is against this background that a raft of guidance has been, and continues to be issued and new legislation in the form of Coronavirus Act 2020 (CA 2020) has been enacted to, hopefully, provide assistance for all concerned.
Is a tenant required to pay rent?
The CA 2020 does not change the position that a tenant is legally obliged to pay rent in accordance with the terms of the lease, what it does, however, is provide that a landlord may not forfeit the lease for non-payment of rent until at 30 September 2020 (the moratorium was originally due to expire on 30 June 2020 however the government have powers to extend such measures and it is feasible that the this period could be extended further). It should be noted that for the purpose of the CA 2020, rent includes any sum that a tenant is liable to pay under a business tenancy, for example, service charge, not merely the annual rent. In theory, it would seem that a landlord is not prevented from forfeiting for any other breach, provided that the relevant formalities are complied with but one would imagine that the courts would not look favourably on a landlord taking such action for the next few months.
As alluded to above, the moratorium on forfeiture does not operate as a rent free period and where sums due have not been paid, a tenant remains liable for them and interest will accrue on the debt. Landlords, should they be minded to do so, still retain their other remedies, for example, suing for the unpaid sum.
Not all tenants will be protected by this moratorium on forfeiture. Parties occupying by virtue of a licence or a tenancy at will are excluded, as are agricultural tenants and certain tenants in the telecommunications and mining industries.
Many landlords are keen to agree monthly payments, rent deferrals and other concessions as a means to ensuring that once the life gets back to something nearing normal, tenants are still trading and they are not left with vacant units. Thus, the key to mitigating the effects of the current situation for both parties to a lease is communication. Any agreement reached could be documented by way of side letter but these must be carefully drafted so as to ensure that a landlord maintains, so far as possible, the ability to recover the deferred rent at a later stage. It is key to ensure that the obligation to pay rent in accordance with the lease is not waived inadvertently. Wrigleys have a suite of pro-forma letters that can be used in such circumstances. Please do contact us if you require advice in this regard. Landlords should also consult their accountants on the likely tax implications of deferring or waiving rent payable.
Landlords whose properties are mortgaged may need to consider agreeing any rent deferrals with their mortgage lender prior to formalising the same with their tenants.
It would be advisable for landlords, particularly where they hold substantial portfolios of properties, to ensure that they are making a fair assessment of their tenant's circumstances and keeping records of what has been agreed in each case in order that they can demonstrate that they are treating all tenants equitably and can track when arrears should be settled.
Does a tenant have any basis for terminating the lease?
Whilst we are all being encouraged to work from home wherever possible and certain businesses have been required to cease trading, the guidance from the government thus far has not required landlords to close buildings such as multi-let offices. It is not usually permissible for landlords to restrict tenants' access to its premises, even if that might be sensible in light of current guidelines. It is possible therefore that if a landlord closes a building, such conduct may constitute a derogation from grant, permitting a tenant to seek an injunction or damages.
A contract, such a lease, can be deemed to be frustrated and therefore open to termination when unexpected circumstances make it impossible for the contract to be fulfilled. The doctrine of frustration has been considered in the context of leases recently where it was ruled by the High Court that Brexit was not a frustrating event. Frustration has a very narrow application and although each case would be considered on its facts, it is unlikely that the courts would rule in favour of a tenant claiming frustration due to COVID-19.
It should also be noted that some leases contain 'keep open' clauses, requiring the tenant to continue to trade from the premises. Such clauses are unlikely to be enforceable in the current circumstances, particularly as a tenant will also be under an obligation to comply with laws and regulations relating to its use of the premises and such provisions are likely to take precedence over the keep open clause.
Will insurance provide any assistance?
It would be advisable for both parties to check their insurance policies to ascertain whether losses currently being incurred, for example, loss of rent are covered, especially in circumstances where a property is required to be closed.
Theoretically, whilst COVID-19 could be covered by insurance, for a payment to be made, the rent suspension provisions in a lease must be triggered. Generally speaking, rent is only suspended on the occurrence of physical destruction of, or damage to, a property and as COVID-19 causes neither of these, the relevant provisions in a lease are unlikely to apply. Whilst businesses have also sought to claim under business interruption clause in their policies, the Association of British Insurers has expressed the view that such policies are unlikely to cover COVID-19.
What is happening to payment of business rates and are any other financial incentives available?
Certain business, including retail units, cafes, restaurants and bars, hotels, cinemas and gyms have been granted a business rates holiday for the 2020/2021 tax year. In addition certain businesses in the retail, hospitality and leisure sectors, with rateable values of less than £51,000 will be able to apply for grants as follows:
Properties with a rateable value of up to £15,000 – grant in the sum of £10,000; and
Properties with a rateable value of over £15,000 but less than £51,000 – grant in the sum of £25,000.
The Financial Conduct Authority has also issued guidance for mortgage lenders which makes it clear that firms should grant customers payment holidays where they experience difficulties in meeting repayments as a result of COVID-19 and ensure that there is no additional fee or charge (over and above additional interest) as a result of the payment holiday.
In order to ensure, so far as possible, continued financial stability, parties would be well advised to explore all of the avenues of support available to them, which thus far include, amongst others:
The Coronavirus Job Retention Scheme, which introduces the concept of furlough and provides for employers to recover 80% of pay (up to a maximum of £2,500) from HMRC;
The availability of grants of up to 80% of a self-employed individual' s trading profits (subject to a maximum of £2,500) per month for 3 months;
deferral of VAT payments for a quarter (that is up to the end of June 2020); and
deferral of upcoming self-assessment tax payments for self-employed persons (which were due on 31 July 2020) until January 2021.
Is there any impact on other obligations binding on a landlord?
It may be incumbent upon landlords to provide enhanced cleaning services in light of COVID-19 with the level of such services being dependant upon the type of property in question. Whilst one would imagine that landlords would not object to providing the services, they may well be concerned as to whether they can recover the costs of such enhanced services from their tenants. The wording of service charge provisions in leases will need to be considered carefully to ascertain whether costs can be passed on. Service charge clauses often allow landlords to exercise discretion in providing additional services in the interests of good estate management and it is likely that extra cleaning or security measures required to ensure compliance with social distancing requirements could be recharged through the service charge.
Have any measures been announced in relation to residential tenancies?
The CA 2020 also introduced measures protecting residential tenants which seek to ensure that people cannot be evicted from their homes during this crisis. The relevant provisions confirm that any notices that are served to terminate a residential tenancy must give at least 3 months' notice and although notices to terminate residential tenancies can still be served, possession proceedings cannot be commenced until expiry of the notice period. Furthermore all ongoing housing possession actions have been suspended by the courts, with the suspension initially being for a period of 90 days but this was subsequently extended until at least 23 August 2020.
What can we expect going forward?
This is a rapidly evolving situation and both landlords and tenants alike should stay up to date with the guidance being issued and, equally importantly, continue to communicate with each other as to their respective positions. Whilst the measures introduced by the CA 2020 are only temporary, at the time of writing there is no visibility as to just when things might start to return to something like 'normal'. Additional measures may well be implemented in the coming weeks to try to ensure, so far as possible, that we can all weather this storm.
If you would like to discuss any aspect of this article further, please contact Donna Radcliffe or any other member of the Property team on 0113 244 6100.
You can also keep up to date by following Wrigleys on Twitter here.
The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors