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

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 three extensions to that moratorium period, the first until the end of September 2020, another until 31 December 2020, a third to 31 March this year, and most recently to 30 June 2021.

The moratorium has been a lifeline for British business struggling with the financial effects of the pandemic, giving many tenants some much needed breathing room to focus limited available funds where most needed without fearing that they might lose their premises in the meantime without warning.  However, the moratorium has only stopped landlords taking action to forfeit premises for unpaid rent and has not functioned as a waiver of any of that rent accruing in the interim.  Any arrears remain due and payable, and if those arrears are still outstanding when the moratorium ends the right to forfeit for non-payment of them returns.

Given the comments in the government’s last announcement, it is expected that no further extension will be made beyond June.  However, it is important to note that no final announcement has been made at the time of writing, and readers should always seek up to date advice from a solicitor before taking any action.

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

The moratorium preventing landlords of commercial premises from forfeiting their tenant’s lease is due to end on 30 June 2021.  Once it ends, landlords will be able to forfeit their tenants’ leases if the tenant is in any arrears of rent accrued during the pandemic which they haven’t reached an agreement in relation to.

Why is this significant for commercial tenants?

Many commercial tenants are in substantial arrears of rent because of cash flow problems caused by the commercial challenges of the pandemic.  A large number of these tenants do not expect to be able to remedy the arrears in full by 30 June 2021, and are thus at risk of forfeiture.

Landlords can risk prejudicing themselves if they discuss the lease or the arrears with the tenant after the arrears have fallen due, and as a result commercial forfeiture usually takes place without any warning or notice from the landlord.  It is often carried out at a time of day when the premises are deserted, like the early hours of the morning, by a team of bailiffs or enforcement agents who re-enter and change the locks, and a notice is fixed to the door for the tenant or staff to discover later in the day when they arrive.

Consequently, forfeiture can be an incredibly stressful, upsetting and tense experience for tenants to go through.  Without premises most tenants have no business, particularly consumer-facing businesses like hospitality and retail.  Even businesses who are able to move their operation struggle to do so without notice, and any stock or assets need to be removed from the premises within a few days (at a time arranged with the landlord, who will give the tenant a limited period of access).

There are circumstances where the tenant can apply to the court for relief from forfeiture, but the arrears must be paid in full first, along with the landlords costs, and given that the tenant will also have its own legal fees, this is an expensive way to clear the arrears.  Many tenants will also suffer damage to their business’ reputation, and they will be unable to trade during the period between forfeiture and the application for relief.

Tenants who are in arrears of rent but who do wish to continue to occupy their current premises should therefore be making sure they take action immediately.

What action needs to be taken?

There are a number of options for tenants who have arrears of rent, but they need to be taking action urgently to minimise or avoid their risk of forfeiture.

1. Speak to a solicitor.  This is a particularly relevant if you are a tenant who is able to pay some arrears but not all, as a solicitor will be able to strategise with you about the best way to utilise those available funds.  A well timed part-payment can block the landlord’s ability to forfeit until the next quarter becomes due, buying you up to three more months to trade and settle the arrears.  Your solicitor will be able to advise you about how to go about this, and whether it is appropriate in your circumstances.

2. Come to an arrangement with your landlord.  Many tenants feel that trying to negotiate with their landlord is pointless, especially if they simply cannot afford to pay the arrears any quicker.  This is not true, and there is a lot that can be achieved through discussion.  Remember, your landlord will have no rent coming in at all if they forfeit your lease, and if they can’t re-let the premises quickly they will also be liable for business rates, building insurance and other expenses.  They are therefore likely to be as keen as you are to reach an agreement.

3. Get advice about the market value of your premises.  Whilst you are unlikely to have any right within your lease to renegotiate your rent, if the market rate is much lower than the rent you are paying because of the effect of the pandemic there may be scope to negotiate a rent reduction or partial waiver of your rent with your landlord.  The agent might also have new prospective tenants willing to take an assignment of the lease from you, subject to advice from your solicitor about whether such an assignment is permitted by the terms of your lease.  Your solicitor will be able to recommend a good commercial agent in your area.

4. Consider whether the premises still serve your needs.  It may be the commercial landscape has changed during the last year in ways that mean your business is no longer suited to the premises.  A solicitor may be able to help you to negotiate a surrender of the lease, which can be cheaper and less stressful than allowing the lease to be forfeit by the landlord.  It will also protect your reputation if you plan to continue trading elsewhere, and allow you to leave on your terms and in your own time.

5. If your financial troubles run deeper than just the rent arrears, take some insolvency advice.  There is an array of business rescue legislation available to tenants who are struggling with cash-flow, and options are not limited to just winding the business up.  Taking advice before the moratorium expires is essential as some insolvency routes come with moratoriums of their own and getting these in place in advance will avoid any exposure in the interim.  Again, your solicitor will be able to recommend a suitable insolvency practitioner for your needs.

6. Finally, if you are able to pay the arrears in full before the deadline – pay them!

*The information set out in this article is correct at the date of publication (16 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.

Useful links:

• Code of practice for landlords and tenants of commercial property across the UK >
• Forfeiture of commercial leases – Section 82 Coronavirus Act 2020 >
• Stay of all possession proceedings – Practice Direction 51Z >
• Commercial Rent Arrears Recovery (CRAR) – The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 >
• Statutory demands and winding-up – The Corporate Insolvency and Governance Act >

Contact us

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 [email protected]. Alternatively, contact a member of our Commercial Property team in Bournemouth.