Back in June, just as lockdown restrictions across England were beginning to lift, the government published a code of practice that outlined the steps which pub landlords and their commercial tenants should follow during the Covid-19 pandemic.
“I can’t abandon that tool any more than I would abandon a nuclear deterrent. But it is like a nuclear deterrent, I certainly don’t want to use it. And nor do I think we will be in that position again” – Boris Johnson, July 2020.
We are now in the second of what will inevitably be a series of lockdowns resulting in the closure of most retail outlets, pubs and restaurants once again. So, how can pub landlords and tenants help each other to ensure a relationship that lasts until Christmas when, Johnson assures us, everything will be back to normal?
The foreword to the code of practice states “tenants who are able to pay their rent in full should continue to do so, whilst those businesses that cannot pay in full should communicate with their landlord and pay what they can. Landlords should also provide support to businesses if they too are able to do so”. Contingent to this, the code suggests that pub landlords and tenants should communicate with each other for both parties to have an understanding of each other’s financial positions.
Concessions should be considered by pub landlords where they “reasonably” can be made, taking into account their own financial obligations as well as the tenant’s financial position and how this has been affected by a loss of business. It’s vital to stress that all financial details shared here should be treated sensitively and confidentially between both parties. Communication is key, therefore pub landlords who refuse to, or simply cannot, make concessions for their tenants should explain why they are doing so. Concessions could, for example, involve a rent-free period, payment monthly rather than quarterly, a deferral of rent or waiver of interest on late payment. Should a rent concession be agreed between both parties, it should be confirmed in writing that any concession be automatically halted if a CVA is proposed for creditors to vote on. The voting rights of the landlord will then be by reference to the original full amount and not by the reduced amount agreed in the concession. A written memorandum is necessary to make any changes to the agreed lease, and legal advice should be sought if there are any concerns.
It’s imperative that pub landlords take the appropriate steps if an agreement cannot be made with their commercial hospitality tenants. Debt proceedings can still be issued against the tenant or guarantor, with judgments being enforced in the same form as prior to the pandemic. This can include instructing a High Court Enforcement Officer to seize goods from the premises – however, for tenants who are still trading, this is a rare possibility.
If the current tenant was assigned their lease from a previous tenant, the landlord can also seek recompense from the latter. Please note that a section 17 notice will have to be served within six months of the debt falling due. In cases of sublettings by the tenant, a landlord could serve notice on the subtenant requiring the rent to the paid direct to the superior landlord but the rent must be at least 276 days in arrears and this will increase to 366 days on 25th December.
Forfeiture can be used in cases where the lease contract has been breached and the tenant has been given time to remedy any breaches under section 146 of the Law of Property Act. This cannot however be used for non-payment of rent, which I will address later.
Should the tenant go into administration, any debts owed which fall under the lease agreement (rent, service charges etc) can be paid as an expense of the administration. Payments to the landlord will be prioritised ahead of other creditors if the property continues to be used for the administration’s benefit.
However, certain restrictions have been applied in order to protect commercial tenants’ hospitality businesses. Landlords are still not permitted to take certain actions, such as the forfeiture of commercial leases for non-payment of rent, under section 82 of the Coronavirus Act 2020. This forfeiture moratorium will be in place up until 31st December 2020, after an extension from the original deadline at the end of June. With the new lockdown battering the finances of many businesses in the retail and hospitality sector, it’s very likely that this will be extended again.
CRAR (Commercial Rent Arrears Recovery) is not an available process for landlords, with the exception being when at least 9 months’ rent is overdue. On the next quarter day where rent is owed (25th December), the point at which CRAR can be instigated will be extended to 12 months of overdue debts. Similarly, winding up petitions and statutory demands are also prohibited unless the landlord can prove that the tenant’s negative financial position, which has led to debt owed, was not brought on by the impact of Covid-19.
The steps to take should be dictated by how far a commercial landlord wishes to balance the relationship between their hospitality tenant during this difficult time with prioritising one’s cash flow.
And when we get through Lockdown 2, we have Brexit to look forward to…