DATED: 31 JULY 2020 What if your commercial tenant stops paying the rent? Or, if you are a tenant and cannot pay the rent, what action can the landlord take? Commercial Property expert, Sophie Robins answers questions frequently asked by clients about ‘forfeiture’, a landlord’s right to bring the lease to an end in certain circumstances.
What does the term forfeiture mean?
Forfeiture is when a landlord exercises a right to end the lease and take back possession of the property because the tenant has breached the terms of that lease. This right must be ‘expressly conferred’ and it is usually found written as a term of the lease.
When is a landlord allowed the right to forfeit?
The right for a landlord to forfeit the lease typically arises when the tenant has not paid rent on time, there are persistent breaches of tenant covenants in the lease (e.g. to keep the property in repair) or the tenant suffers an event of insolvency (such as a winding up petition being presented against it by a creditor).
How do you forfeit a lease?
For a lease of commercial property, a landlord can affect this right to forfeit a lease by peaceable re-entry or by issuing court proceedings. To peaceably re- enter, a landlord changes the locks and puts up notices to inform the tenant that the lease has been brought to an end.
In response to the Covid-19 emergency, the Government has put in place new legislation that restricts a landlord’s right to forfeit a commercial lease. An overview of these restrictions is set out below.
Is forfeiture reversible?
No, not unless a court orders relief from forfeiture. It is therefore not a step to be taken lightly. Furthermore, a potential new tenant for property that has been the subject of a forfeit lease is unlikely to want to take possession without assurance that the tenant has not applied to the court for relief, which can take up to six months.
What is ‘relief’ from forfeiture?
Relief from forfeiture is a remedy that can be granted by the courts to tenants who have forfeited the lease because of payment arrears but paid those arrears within six months of the date of forfeiture (meaning the tenant has addressed the underlying reason for forfeiture). Only this relief has the affect of resurrecting the lease.
When will the government’s temporary restrictions from forfeiture in response to the Covid 19 emergency end and what do they cover?
In these unprecedented times, the Government has taken significant steps to protect the economy, including intervening in the commercial property market. One of the principle measures which impacts landlords and tenants of commercial property is section 82 of the Coronavirus Act 2020. This prevents a landlord from forfeiting a lease for non payment of rent or other sums due under that lease until 30 September 2020 or such later date if extended under the terms of the legislation.
Whilst this restriction is in place landlords cannot forfeit a lease for non payment of rents by peaceably re-entry or court proceedings.
It is worth noting that these rent arrears will nevertheless still remain due and only by an express waiver will the landlord loose its right to forfeit a lease for these sums when the restricted period comes to an end.
However, the measures in the Coronavirus Act 2020 do not address the other ways landlords can typically forfeit leases, namely for disrepair and insolvency.
A tenant who has allowed their property to fall in to disrepair could be vulnerable to forfeiture. However, the landlord will still need to serve a section 146 notice giving realistic time limits to allow the tenant to repair the property and these timescales are likely to last beyond the restriction period.
Until the Corporate Insolvency and Governance Act 2020 also enacted in response to the Covid 19 emergency and which came in to force on 25 June 2020, tenants who were not able to pay their rent were at risk of their lease being for forfeit for insolvency. The government was slower to act on this despite using accelerated parliamentary process and there were a couple of reported cases where the courts decided to restrain the presentation of a landlord’s winding up petition in light of the impending legislation, therefore giving effect to this legislation before it was in force.
The Act now prohibits the presentation of winding up petitions based on unsatisfied statutory demands served between 1 March 2020 and 30 September 2020, unless it is possible to show that Covid 19 has not had a financial effect on the tenant or that it would have been unable to pay the debts regardless of the financial effect of Covid 19. In practice, this may be difficult to demonstrate.
These Acts are intended to give businesses a lifeline to help them recover from the financial impact of the lock down period and provides the Government with flexibility (should the need arise) to extend these provisions now that they are in force. However, these measures do not deal with the main issues of indebtedness and the position that tenants will find themselves in when these restrictions do expire.
The Government’s code of practice for the commercial property sector
It is widely reported that the impact of Covid 19 on the retail hospitality and leisure sectors has been particularly acute, where incomes have dropped to almost nil whilst still incurring rent and other reoccurring liabilities. In response, the Government has issued a voluntary (not legally binding) code to promote negotiations between landlords and tenants in the commercial property sector to address the consequences of the coronavirus lockdown period.
This code is to help landlords and tenants alike to avoid forfeiture situations and to encourage collaboration and to act reasonably and responsibly to ensure that each party has realistic expectations as to how and when rents can be paid. The code suggests options for new rent payment arrangements but it this not an exhaustive list. Whether a landlord or tenant are seeking to document their agreement or if forfeiture is being considered the parties should seek legal advice.
This article provides just a brief summary of forfeiture, a complex area, and the current restrictions affecting this right. Should you require advice on your own specific circumstances, please contact Sophie Robins or another member of our Commercial Property team who will be happy to advise you. The team work closely with Girlings’ Dispute Resolution team which is highly experienced in resolving landlord and tenant issues. Girlings has offices in Ashford, Canterbury and Herne Bay.