Impact on COVID-19 on commercial leases

The government has announced that it will introduce emergency legislation through the Coronavirus Bill currently going through parliament to protect commercial tenants unable to pay the quarter rent which would have fallen due today. Many landlords and tenants had already been in individual negotiations to make suitable arrangements but the certainty has been met by a sigh of relief.

Most commercial leases contain provision that the landlord may forfeit, or bring to an end, a tenancy where the tenant fails to pay the rent for a period of 14 or 21 days after the due date. The government has stated that commercial tenants will be “protected from eviction” if they are unable to pay their rent because of COVID-19. The protection is to last up until 30^th June 2020 but there is a possibility of this period being extended if necessary.

While this news will come as relief for tenants grappling with these unprecedented circumstances, the government has made it clear that this is not a rental holiday and the tenant remains liable for the rent; it is simply a moratorium against eviction. To this end, it seems that the announcement does not relate just to eviction due to unpaid rent but also to evictions due to other unpaid sums under leases such as service and insurance charges. However, the announcement does not protect businesses against other remedies available to landlords such as Commercial Rent Arrears Recovery (CRAR) or serving a statutory demand as a precursor to a winding up petition (although it appears that winding up petitions will be adjourned for the foreseeable future https://gatehouselaw.co.uk/the-adjournment-of-todays-winding-up-list/).

As with so many things over the last few days, we are all feeling our way through new situations. This announcement does beg one particular question – how will we test whether a tenant is unable to pay its rent because of the virus? We have only been on lock down for 36 hours at the time of writing and the situation has evolved rapidly and only very recently. It is difficult to see how cash flow over the previous quarter months can be said to have been significantly impacted because of COVID-19 and it is far from clear that tenants will be able to say they were unable to pay due to losses they anticipate incurring as a result of the outbreak.

Does that mean this announcement was premature and would have been better left until next quarter when the financial impact of the sudden shut down of the economy was being felt even harder? The answer, assuming that businesses will be allowed to say they could not pay the rent due to the pending impact of the virus, is likely to be that the government’s aim was to give businesses a life line so that they could keep the cash they have to cover essential running costs and top up the remaining 20% of salaries that the government will not be covering. Without giving them this opportunity at this stage, we would have likely seen a sudden deluge of CVA applications and companies entering into liquidation. In this way, the government is working towards the “economic hibernation” strategy whereby businesses and individuals are helped to teeter through the coming months and be able to reopen when normality returns.