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Forfeiture moratorium on commercial leases – what commercial landlords need to know

10/06/2021

At the start of the pandemic, in March 2020, the government introduced new, temporary legislation which prohibited forfeiture of commercial leases by landlords for rent arrears for an initial period of three months, intended to end on 30 June 2020.

Since that first moratorium announcement the pandemic has persisted for longer than anyone could have predicted in those early few weeks.  As a result, and in an effort to protect British business and the wider economy, the government has announced four extensions to that moratorium period, the first until the end of September 2020, another until 31 December 2020, the third to 31 March this year and most recently to 30 June 2021.

That most recent extension, announced in March, came with pledges to substitute some alternative method of protection after June if the pandemic was still affecting business, so it appears that this time the moratorium (as we currently know it) should finally be coming to an end, come what may.  However, this continues to be an unpredictable situation and a final announcement from the government is awaited.

When does the current moratorium on forfeiture by landlords of commercial leases end?

On 30 June 2021, the current moratorium on forfeiture by landlords of commercial leases will end and landlords will regain their right to re-enter the premises where tenants are in arrears of rent.

The moratorium legislation also suspended the landlords’ risk of waiving their right to forfeit for the arrears, and this suspension of waiver will also be coming to an end on 30 June 2021.

Why is this significant?

Landlords of premises where tenants are in persistent arrears and are making little effort to cooperate to resolve those arrears will now be in a position to forfeit the lease, regain possession and control of the premises, and – crucially – re-let those premises to a new tenant so that they can begin to get on-going income again.

However, the end of the waiver suspension is just as significant as the end of the moratorium, if not more.  The common law states that where a commercial lease expresses an obligation to pay rent as a “covenant” a tenant’s breach of that covenant will automatically terminate that lease, and the landlords’ right to re-enter is simply a consequence of that lease having already come to an end.  As a result, where the landlord does something which “acknowledges the lease as existing” after the date that rent becomes due but before carrying out the re-entry, that right to re-enter is waived.

Such actions include (but are not limited to) chasing payment of the rent, asking the tenant to carry out repairs, or writing to the tenant and identifying themselves in the letter as the tenant’s landlord.

What do commercial landlords need to consider?

It is essential that landlords make a commercial decision prior to the expiry about whether they wish to forfeit their tenant’s lease, and should be prepared to commit to that decision.  Landlords may not be able to alter their approach after the deadline has passed.

When coming to a decision, landlords should consider a few important factors:

Is the tenant co-operating?

Forfeiture will return the your property to you but it will not automatically trigger payment of the arrears, which you will need to continue to chase by way of debt recovery action after the lease has been forfeited.  If the tenant is making efforts to pay as quickly as it can, you might obtain payment of the arrears faster if you let the tenant remain trading.

What is the demand for commercial units of this type in this area?

Whilst the market for some commercial units is remaining strong, the effects of the pandemic have been felt heavily elsewhere, with some landlords and commercial agents seeing little to no demand for new premises.  Make sure you understand how likely you will be to re-let your premises if you forfeit the current tenant’s lease.

How has the changing market affected rental value?

You may be able to re-let the premises, but you might not achieve the same rental value set in your current lease.  If the tenant is part-paying during the pandemic, your on-going income might not see much increase if you let to a new tenant.

How much longer is left on the lease?

If the tenant is bound by the lease for years to come, it might be worth keeping them in the Premises so that you can continue to receive pre-pandemic rent levels for the rest of the term, rather than enter into a new lease with a new tenant who might be able to negotiate a lower rent.

How much of a financial burden might the premises be if they cannot be re-let?

Landlords are liable for business rates for the premises if they are not tenanted, save for a short exemption for the first 3 month premises are unoccupied (as long as the tenant hasn’t already used up any of these months) and some pandemic-triggered rates holidays in certain circumstances.  The building will also need to be insured at your own cost, and you will have responsibility for keeping the premises secure.

How viable is the tenants’ business?

If the tenant has been struggling to pay rent for some time, it may well be time to take some action.  If, on the other hand, this is likely to be an anomaly in your tenant’s otherwise perfect record, caused solely because of the pandemic and lockdowns, the future risk could be low.  Hospitality and retail businesses are good examples of tenants who can anticipate a change in fortunes as the country exits lockdown.  Non-customer-facing businesses which haven’t been able to pay rent, such as manufacturing or distribution for online retail, may simply not be profitable enough to justify the premises.

What action needs to be taken?

Landlords who are concerned that they might need to forfeit their tenant’s lease once the moratorium ends need to be taking action now.

1. Speak to a solicitor about whether your lease gives a right to forfeit by re-entry.  Most do, but not all.  There are also usually conditions attached, such as rent needing to be overdue by a certain number of days before the right can be exercised, and the rules are a little different for mixed use premises with a residential element.

2. Take advice from a commercial property agent about the state of the market for properties like yours, in your area.  They will be able to tell you if they think you might struggle to re-let, or if they think the asking rent might need to be reduced.  Your solicitor will be able to recommend a suitable commercial agent, or can liaise with them for you.

3. Make a final, written demand for any outstanding rent as soon as possible.  You do not want to be leaving this to the last minute, as it may have the effect of waiving your right to forfeit if you leave it too late.  Your solicitor will be able to draft and send a demand for you if you are concerned about getting it wrong, and a solicitors letter often has a focussing effect on a tenant where previous direct letters had been ignored.

4. Carry out any negotiations with your tenant as soon as possible, or look to conclude them soon if they are already on-going.  Coming to an agreement with your tenant that works for both of you is always preferable to the uncertainty of forfeiture and litigation.  Once the waiver suspension has lifted, any attempt to negotiate with your tenant could have the effect of losing you your right to forfeit.

5. Instruct your solicitor to schedule the forfeiture.  Forfeiture should be carried out by professional enforcement agents who understand the rules and requirements, and your solicitor will have agents on hand to instruct.  The sooner this is arranged, the higher up the list you will be for your forfeiture to be carried out.  If you leave it until the last minute there may be many other landlords whose leases will be dealt with before yours, and the longer the delay the bigger the risk that you might unintentionally waive your right in the interim.

6. Once the moratorium ends, avoid any contact with your tenant whatsoever and speak to your solicitor before you do anything in relation to the lease.  Instruct any agents managing the premises to put a “rent stop” in place, and contact to your solicitor immediately if any part payment is made.

*The information set out in this article is correct at the date of publication (10 June, 2021). The effect of coronavirus on businesses remains a fast-changing area and so it is important to obtain legal advice to ensure you are properly protected. Visit our Coronavirus (COVID-19) Hub for more Leading Insights.

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If you have any questions regarding the impact of the Coronavirus upon your business or are seeking up-to-date legal advice on property dispute matters, contact Laura Offer on 01202 294 566 or email LauraOffer@steeleraymond.co.uk. Alternatively, contact a member of our Commercial Property team in Bournemouth.

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