The COVID-19 pandemic has caused significant financial distress for many around the globe. With unemployment at a record high in many countries, a vicious cycle has emerged. Lack of spending has led to a lack of revenue, which has consequently furthered a decline in the job market.
Further, following the required social distancing measures, office spaces once full of employees have turned entirely vacant. Companies which once were thriving are now struggling to make the most basic ends meet. These rudimentary struggles include things like paying rent.
Do you own a company and rent out a commercial property? Has lack of pre-COVID-19 income made it difficult for you to pay your rent on time? If so, you are not alone. Are you curious about what rights you may have as a commercial tenant amidst this pandemic? The following guidelines may be beneficial for you to understand.
Understanding typical forfeiture and possession
Under almost any normal circumstances, when you sign a tenancy agreement for a commercial lease, the document often has an unbreakable clause. This clause allows the landlord to forfeit the tenancy under certain circumstances. These circumstances include things like failure to pay rent for a pre-disclosed period, consistent disruptions to the surrounding community, and inappropriate uses of the space.
A landlord can forfeit a commercial property via 1) peaceful re-entry or 2) court order. It is common for a commercial property agreement to favour the landlord. In other words, the clause in the lease is phrased to make it easy for the landlord to quickly regain possession of the property if a tenant is in any breach of the agreement.
Relevant for the subsequent discussion on COVID-specific changes to commercial property rentals, forfeiture and CRAR are two terms which must be understood. Forfeiture refers specifically to a clause in the lease which allows the landlord to take back possession, consequently evicting, a tenant if they fail to pay the rent promptly. This is the most basic agreement in any lease and is universally included.
What is Commercial Rent Arrears Recovery (CRAR)?
Commercial Rent Arrears Recovery (CRAR) refers to the landlord’s right to send in bailiffs to enter premises and remove a tenant to satisfy a debt under certain circumstances. This is an extreme, but effective measure embedded into many commercial landlord and tenant relationships. It is often used as a last resort. Still, it is an effective way for landlords to maintain their properties when faced with problematic tenants.
COVID-19 and Commercial Tenancies
As COVID-19 has permeated through offices, retail companies, industrial organisations and beyond, there has been a crisis in rental payments and property vacancies. The government has, so far, stopped short of suspending rent payments entirely. Still, there have been significant changes to the system which have considerably increased the protection of tenants. Legislative action has been instrumental in these protections.
Firstly, on 26 March, the government announced the Coronavirus Act 2020, which was a widespread piece of legislation which influenced numerous issues in various domains. One critical part of this legislation referred expressly to commercial tenants severely hurt by COVID-19 and the economic effect that a nationwide lockdown had. The Act completely changed the way commercial landlords could proceed with removing tenants unable to make payments on time.
Forfeiture. As mentioned previously, forfeiture is typically the fail-safe for any landlord. Instead, under the Coronavirus Act 2020, commercial leases for non-payment of rent during the relevant period are entirely frozen. It is important to note that “rent” encompasses any payment required by the tenant, including:
- Monetary compensation for physical space
The relevant period was initially specified as 26 March through 30 June. It has since been extended through 30 September. During this period, a landlord can under no circumstances evict a tenant for the non-payment of sums due under a lease. Additionally, the Courts are not able to make any order for possession or eviction.
CRARS and Coronavirus Act 2020
The Coronavirus Act 2020 also prevents landlords from using CRAR unless they are owed over 90 days of unpaid rent. Within this 90 days, if the tenant has made any partial payment of the outstanding sum during the relevant period, an eviction claim by the landlord is void. In other words, any effort to make a rent payment is evidence of a reasonable attempt by the tenant to follow through with the original agreement. As such, legal action and eviction are not supported.
A petition based on an inability to pay debts can also not be presented by a creditor during the period of 26 March through 30 September as grounds for eviction. The only exception to this rule applies if the landlord or creditor can prove that COVID-19 did not play a role in the financial hardship of the company. Instead, if they are not paying to take advantage of the new scheme and there is clear evidence for this, exceptions may be made.
What constitutes a relevant business tenancy?
A relevant business covered by the Act is a tenancy defined by the Landlord and Tenant Act 1954. These include all of the following:
- A lease
- An under lease
- A periodic implied tenancy
- An agreement for lease
- An agreement for an underlease provided the tenant has been occupying the property for business purposes
- Leases which have been contracted out of the protection of the 1954 Act
It does NOT include:
- Short term leases, or leases less than six months in length
Ultimately, COVID-19 has had rippling effects on every imaginable section of the economy. Luckily, the swift government ordinances have strongly favoured the tenant. These add protections and longevity to those potentially struggling financially as an effect of this ongoing pandemic. For a full breakdown of the Coronavirus Act 2020, see here.
If you need legal advice about your commercial lease or are worried about a potential forfeiture or possession proceeding, call a specialised commercial law solicitor immediately. Having to manage to keep your business afloat amidst all of the uncertainty surrounding COVID-19 is more than enough stress! To assure yourself and your employees that the new government ordinances apply to your business, be sure to have any questions answered by a qualified professional.
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