Six months on and new rule of six – where are we now with commercial property?
This article was written by Sanam Hussain and was originally published on 17 September 2020. It has since been updated. As this is a fast moving topic, please note that this article is current as at 28/09/20. For further information, please contact Sanam Hussain, Simon Dawes or Angela Bhaseen.
The government announced on 24 September 2020 that the ban on serving of statutory demands and presenting of winding up petitions is extended until 31 December 2020. This extension is now in line with the forfeiture and CRAR extensions that were announced by the government on 16 September and detailed below. Business Minister Lord Callanan said:
Unfortunately this latest announcement has again stripped landlords of any remedies against tenants for unpaid rent arrears until the end of the year. Given that the government has stated the new restrictions are likely to be in place for the next six months, it would not be surprising if these measures are extended further. Landlords are once again having to carry the burden of the tenants debts and will be further aggrieved at this latest development.
Our previous articles detailed the government measures brought in to assist tenants affected by the COVID-19 pandemic, including the publishing of a code of practice for commercial property relationships (The Code).
To recap, these protections are:
- Forfeiture: landlords could not take steps to forfeit leases until 30 September 2020
- Commercial Rent Arrears Recovery (CRAR): landlords could not take steps to use this procedure until 30 September 2020
- Statutory demands and winding up petitions: where a company could not pay its bills due to COVID-19, the serving of statutory demands and presenting winding up petitions at court are banned until 30 September 2020.
The Government announced on 16 September 2020 that the forfeiture and CRAR protections would be extended until the end of 2020, but this did not include the serving of statutory demands and issuing of winding up petitions.
The Secretary of State for Housing, Robert Jenrick MP, said the extension "will stop businesses going under and protect jobs over the coming months” and that extending the ban until the end of the year would give struggling high street retailers and restaurant chains a chance to "focus on rebuilding their business over the autumn and Christmas period”.
The government is hoping the extension will help protect jobs once the Coronavirus Job Retention Scheme ends in October 2020. In light of this development, it is even more imperative that landlords and tenants engage with one another to try and reach a solution and the government has encouraged landlords and tenants to follow the Code. The Code was published in June and set out options landlords and tenants could explore such as:
- A full or partial rent-free period for a set number of payments period
- A deferral of the whole or part of the rent for one or more payment periods
- The payment of rents over shorter payment periods for a set time (i.e. monthly rather than quarterly) including provision for their payment in arrears
- Landlords drawing from rent deposits on the understanding that they will not require the deposits be ‘topped up’ by the tenant before it is realistic and reasonable to do so
- To reduce rent, in whole or part, across other units occupied by the tenant and owned by the landlord, as part of a negotiated agreement applying to a portfolio of unit
- To waive contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable
- To agree with the tenant(s) to split the cost of the rent for the unoccupied period between them
The overriding objective of the Code was for landlords and tenants to work together in ‘good faith, reasonably and flexibly’ and to co-operate and collaborate with one another transparently. The Code applies to all landlords and tenants in the UK who are parties to commercial leases, regardless of the sector those parties operate in.
Crucially however, the Code was not and is not binding and there is still no suggestion the government will make the Code binding. This unfortunately has led to situations where tenants who are capable of paying the rent have refused to do so.
We have seen a rise in landlords proposing turnover rents for tenants who are in the hospitality and food and beverage sector. Consequently, the new rule of six will be mostly felt by restaurants, private parties and events and it will be these types of tenants who will be most affected.
The government has extended the ban, with the backdrop of the upcoming 29 September quarter rent date. Many tenants have already switched to monthly rent payments so the September quarter date may not be of huge significance in itself. Landlords are already aggrieved that they have had to bear the brunt of the financial impacts of the pandemic (and still are) given that no protections have been put in place for them against tenants who are able to pay the rent but are refusing to do so. The Housing Secretary commented on 16 September that “where businesses can pay their rent, they should do so” but it has been clear over the last six months that this has not been the case. As the moratorium on statutory demands and winding up petitions ends this month and in the absence of the government announcing an extension to that also, we may see many landlords adopt this route. As a result, there may be many insolvencies to come just before Christmas.
This, coupled with the fact that most March and June quarter rent collections were poor, will mean that, unfortunately, landlords are in for a difficult winter, a season which due to Christmas, is usually one of the most financially lucrative. This is further compounded by the December quarter rent date falling on Christmas Day.
- Decoding the Code of Practice for commercial property – where are we now?
- Landlords and tenants coping with COVID-19 – where are we now?
- Are turnover rents the answer to accommodate the interests of both business tenants and landlords?