My tenant wants to delay paying rent. What should I do?
As Britain moves into the second month of its COVID-19 lockdown, with approximately 10% of the world’s officially recorded deaths from the disease, the economic fallout remains uncertain. What is clear is that many tenants, be they residential, commercial or agricultural, are anticipating difficult times ahead, and are contacting their landlords to ask for flexibility about their rent payments.
Different sectors will be affected in different ways, and this is already showing up in statistics. For example 71% of UK office rents were collected for the March quarter end while Grainger plc (the self-described UK market leader in the private residential sector) reports 95% rent collection for March 2020.
COVID-19 will rarely release a tenant from its obligations to pay rent; only specific wording in the agreement will allow that where the tenant still has full use for the property. It will therefore be for the landlord to decide, at its discretion, whether rent should be waived or delayed and on what basis. For example, the Grosvenor Estate has waived rent for independent and vulnerable tenants; at the other extreme some landlords have threatened statutory demands or winding up petitions.
How any individual landlord proceeds will depend on its duties under the law (for example trustees must not neglect their fiduciary duties to their beneficiaries) and its own commercial needs, including cash flow. Government has urged landlords, tenants and high street businesses to engage constructively with each other in the light of the financial packages that have been introduced to support businesses during the COVID-19 outbreak, and asks tenants to:
‘pay rent where they can afford it or what they can in recognition of the strains felt by commercial landlords too’.
To enable this conversation to be carried out in an efficient and informed way, we recommend that tenants provide details of their financial outlook to landlords on an open basis, including details of expected cash flow, and when applicable, whether tenants have furloughed staff, applied for commercial rates rebates and considered business interruption clauses in their insurance. Landlords may also ask tenants to demonstrate that other creditors are being asked to take a fair share of the pain, including suppliers, HMRC and their banks, and that tenants are cutting their own costs before coming to a judgement as to whether, and to what extent, rents can be delayed or waived.
In the commercial sector similar decisions may need to be taken about service charges and insurance rents, against the background that a landlord needs to pay for services and insurance to ensure it complies with its lease covenants.
Landlords may agree to delay rents, in which case a decision will also be required as to whether interest should be payable and at what rate, or waive them altogether. Either way the agreement should be properly documented. The best and quickest way to arrange this is by a side letter, to be drafted with the benefit of legal advice and to be signed by both landlord and tenant and by a guarantor if there is one, to be kept with the property deeds. The side letter should set out all the changes, including a statement that it does not vary the lease, how long the temporary arrangement is to last, and in what circumstances the landlord could end the arrangement earlier than as agreed.
If a tenant refuses or is not able to pay rent, the landlord will wish to consider its options. The simplest, but probably temporary solution, is to take rent from the rent deposit if there is one. Commercial landlords will need to review the terms of any relevant deed, and, where applicable, a residential landlord under an assured or assured shorthold tenancy must comply with the terms of the tenancy deposit scheme. A landlord may also look to the tenant’s guarantor.
Most rent deposit deeds relating to commercial property require the tenant or its guarantor to top up the deposit if money is taken from it. Where a residential tenancy allows such a top up, landlords must ensure they do not fall foul of the Tenants (Fees) Act 2019 which provides that deposits may not exceed five weeks rent where the annual rent is below £50,000, or six weeks rent where the annual rent is between £50,000 and £100,000. Of course the tenant may not make this top up either, but the landlord’s cash flow will have been maintained for the moment.
In normal times landlords would have had a number of other options. Broadly these range from exerting pressure on the tenant to pay, taking action to recover rent as a debt from tenant or guarantor, or ending the tenancy. However, the government has brought in a range of measures under the Coronavirus Act 2020 aimed at protecting commercial tenants and others that greatly restrict the options available to landlords. In addition, the pressures on the courts to conduct their business in line with social distancing requirements means that if and when action can be taken, it is likely to be delayed.
Relatively little action has yet been taken by the government to protect residential tenants, with the statutory minimum notice period for ending residential occupation being increased from two months to three. However, the courts have suspended all housing possession actions, so that no hearing can actually progress to a stage where an individual can be evicted. This applies to all residential occupation in the private and public sector, including licenses and mortgagee cases. The provision expires on 30 September 2020 unless extended.
Where a landlord is convinced it is in their best interest to remove a tenant, early service of a notice will bring that landlord’s case towards the top of the queue when the courts reopen. Such a landlord will hope that it is able to re-let the property quickly to avoid an extended void period where no rent can be recovered, even if the defaulting tenant pays the rent and compensation up to the time it actually vacates the property. Note that a landlord cannot withdraw such a notice. At least a tenant in possession must cover council tax.
Note also that the Coronavirus Act 2020 has not suspended a landlord’s duties in respect of safety in the accommodation in respect of gas and electrical appliances for example; landlords must demonstrate that they have taken all reasonable steps to comply with the law if they are to avoid being penalised, and so should record what they have tried to do to comply with these requirements.
Commercial tenants are in an even stronger position than residential tenants. The Coronavirus Act 2020 has simply suspended a landlord’s right to start to forfeit a business tenancy for non-payment of rent during the ‘relevant period’ which currently lasts until 30 June 2020 for commercial tenancies. Further, if proceedings have already started, the court may not make an order that requires possession to be given before the end of the relevant period. However, where a tenant is in breach of other provisions of the lease, a landlord may start possession proceedings. Whether the court will be able to hear them remains to be seen. Peaceable re-entry of a property sidesteps court proceedings, but is a high risk procedure.
Most recently, on 23 April 2020, the government announced steps to prevent what it terms ‘aggressive rent collection’. To achieve this statutory demands against commercial tenants made between 1 March 2020 and 30 June 2020 and winding up petitions presented from Monday 27 April 2020, to 30 June 2020 are ‘banned’ where a company cannot pay its bills due to coronavirus. In addition commercial landlords may not use the commercial rent arrears recovery procedure to take control of and sell a tenant’s goods unless the landlord is owed 90 days of unpaid rent. It seems that debt actions, against both residential and commercial tenants and their guarantors, may still be started, provide the courts have the capacity to process them.
The government continues to exhort tenants to pay what they can. These are extraordinary times, but by drawing most of the landlord’s enforcement teeth, the government is tempting more unscrupulous tenants to take a rent holiday.
If you have any questions, please contact Tristan Ward.