Goodwin Insights 28 May 2020

Implications of COVID-19 Restrictions on Lease Obligations in the UK: The Legal Position

This article examines some of the key legal protections for both landlords and tenants of restaurant premises in the COVID-19 period. 

The Coronavirus Act 

The Coronavirus Act 2020 (the “Act”) came into force on 25 March 2020 and grants emergency powers to deal with the COVID-19 pandemic. The Act includes some limited protection for commercial tenants but left some enforcement options open to landlords. 

What protection does the Act provide for tenants? 

The Act suspends rights of re-entry or forfeiture for relevant business tenancies in England and Wales as a result of non-payment of rent for the relevant period – put simply, this means that, for so long as these provisions have effect, landlords cannot terminate business leases if tenants do not pay rent. Rent in this context is defined very widely to include all sums payable under the lease, therefore including principal rent, service charges and insurance rent. These protections initially run from 26 March 2020 to 30 June 2020 but the period may be extended. Ordinarily landlords who have knowledge of a tenant’s breach but take actions which recognise a lease as continuing to exist risk waiving a right to forfeit; the Act confirms that will not be the case during the period these provisions are in force, thus providing some protection for landlords. 

What doesn’t the Act do? 

The Act does not override the obligations in business leases for tenants to pay rents; failure to pay is still a breach of the lease and all remedies short of forfeiture and winding up remain available to landlords. Most business leases will include provisions for penalty interest to accrue on unpaid sums, for example, and that will still be the case during the suspension period.

The Act’s protections are time limited; any tenant who is not up-to-date with all of their lease payments when the relevant period ends (currently intended to be 1 July 2020, though this could be extended) faces the immediate risk of a forfeiture or winding up action by its landlord. The protections which landlords currently have against waiving their right to forfeit will also end on the same date, so landlords may feel they need to act quickly to protect their position.

The Act only provides protection for a tenant’s failure to pay rents, not for any breaches of other lease covenants. Landlords still have the full range of remedies available to them in respect of these other breaches.  

Government closes loopholes 

The Act originally left it open for landlords to take winding up proceedings against tenants for missed payments of rent, pushing them into insolvency. Some landlords used this route to try to bring about an end to leases. On 20 May 2020, the Government published the Corporate Insolvency and Governance Bill (the “Bill”) which will defer landlords’ rights to commence such action for unpaid rent against tenants through a temporary ban on the use of statutory demands and winding up petitions until 30 June 2020, but only where a company cannot pay its bills due to COVID-19. Under these measures, any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court and will not be permitted where the company’s inability to pay is the result of COVID-19. This approach is already being reflected in the courts - a large retailer obtained an injunction against a winding up petition during a private hearing held on 29 April 2020. In that case, the judge recognised that, even though there was no legislation in place, the Government intended the relief from winding up petitions to apply immediately.

Furthermore, the Bill has introduced a new restructuring tool, a pre-insolvency moratorium. When the law comes into effect operators who use the moratorium will obtain further protection from creditors including landlords and suppliers.

In addition, landlords are now only be able to use the commercial rent arrears recovery regime (the process by which they can seize and sell tenant’s good to recover unpaid rent) unless 90 days or more of unpaid rent is owed.

Conclusion

The Government has stepped in to provide tenants with breathing space, currently until 1 July 2020. The measures are designed to save businesses and preserve jobs. However, these interventions in respect of forfeiture and winding up petitions are temporary only. Eventually tenants will need to pay all of the rent and other lease liabilities which have accrued during the hiatus. Accordingly, it is imperative that tenants use the time available to them to seek to collaborate and co-operate with landlords. In our following articles, we will look in more detail at those negotiations, the drivers and constraints for landlords and tenants, and possible compromises.