As noted in our article concerning a tenant’s entitlement to suspend or withhold payments without the landlord’s agreement, a failure to comply with the covenant to pay rents will usually entitle a landlord to peaceably re-enter the property and immediately bring the lease to an end. This is known as ‘forfeiture’. Most commercial leases will allow the tenant a period (commonly 21 days from the due date) within which to pay any outstanding rent before the landlord’s right of re-entry and forfeiture is exercisable. In some cases, this may provide the tenant with sufficient “breathing room” to meet its payment obligations under the lease before an actionable breach occurs. However, businesses more severely affected should rest assured that they will not be unfairly evicted from premises if they are temporarily unable to sustain rent payments.
As part of its on-going response to the Covid-19 outbreak, the government has sought to reassure commercial tenants with the passing of emergency legislation. The Coronavirus Act 2020 (“CVA”), which received royal assent on 25 March 2020, brings into force a number of temporary measures designed to address concerns raised by the business community and ease pressure on tenants whose ability to operate, and derive income, from commercial premises has been halted. These measures include making it illegal for landlords to take action to enforce rights of re-entry and forfeiture under businesses tenancies for non-payment of rent for a period of three months, effective between 26 March 2020 and 30 June 2020. This period may be extended further regulations. For the purposes of the CVA, rent includes insurance contributions, service charges and any other sum that the tenant is required to pay under a commercial lease.
In order to preserve landlords’ positions, and help limit the scope for abuse, the CVA additionally provides that no conduct by a landlord (other than express waiver in writing) will result in the loss of a right of re-entry or forfeiture for non-payment of rent while the restrictions remain in force. As a result, tenants should be alive to the fact that these provisions merely suspend a landlord’s ability to re-enter the property and forfeit the lease for non-payment of rent (initially) until 30 June 2020; they do not cause him to lose those rights or prevent him from exercising them after that date unless the suspension period is extended as described above. Equally, tenants should bear in mind that the CVA does not release them from the obligation to pay rent and that interest will nevertheless accrue on late payments.
As a result, tenants should be open and honest with landlords about their financial situations, and engage with them constructively to agree mutually acceptable interim arrangements in order to avoid the risk of “backed-up” claims or actions for re-entry after expiry of the suspension period. For more information about rent holidays and concessions, please click here. Where a rent holiday or other temporary concession would reduce the level of rent income received by the landlord to an unacceptable level, it may be possible for the landlord to draw on the tenant’s rent deposit (if any) to mitigate cash-flow problems caused by business closures, but an extension to the period within which the tenant must top-up the deposit following withdrawal may be required. In any case, the terms of the lease and any rent deposit deed should be carefully reviewed before action is taken.
Tenants should also be alive to fact that the CVA is primarily concerned to protect tenants from eviction for non-payment of rent; it doesn’t expressly prevent a landlord from enforcing its right to re-enter the property where the right to do so arises as a result of a breach of other covenants, such as the obligation to comply with laws or to keep the property in good repair and condition.
However, although landlords have retained the right for these categories of breach at present, it is quite possible that the courts will take a dim view of any attempt to enforce a right of re-entry in the coming months – particularly if the motivation for action is to take advantage of virus epidemic. If landlords intend to exercise a right of re-entry for a breach of covenants while the statutory suspension period continues, care should be taken to observe any procedural restrictions set out in the lease and all notice requirements.
In most cases, a landlord will not be able to enforce a right of re-entry for breach of covenant (other than non-payment of rent) unless and until it has served a statutory notice (known as a section 146 notice) on the tenant specifying the nature of the breach and, where possible, requiring the tenant to remedy the same within a reasonable period of time. Invariably, what is reasonable will depend on the facts of each case but landlords will need to consider the nature of the breach and the amount of time realistically required either to remedy that breach or, where this is not possible, for the tenant to vacate the premises. As tenants may face significant practical difficulties in, for example, arranging for repairs to be carried out during the height of the epidemic, landlords could find themselves at risk of a claim for wrongful forfeiture if they fail to allow tenants additional time.
Due to the on-going impact of Covid-19 and the difficulty landlords might have in finding replacement tenants during this period of uncertainty, we would encourage landlords whose tenants may have breached covenants to discuss and consider the viability of other solutions (where feasible) before taking steps to re-enter the property and forfeit the lease.
This note is for general information and guidance and is not legal advice.