What shall we do with a struggling tenant?

29 April 2020

The COVID-19 pandemic continues to affect businesses and individuals all over the globe in an unprecedented way.

For landlords and tenants in the UK commercial property market, their interests are in some respects aligned; both need to keep the premises safe and secure, avoid the spread of the disease and comply with Government requirements which remain ever-changing, while trying to keep their businesses afloat. The landlord wants to keep the tenant to provide income and the tenant wants to keep its premises as its place of business operations.

In other respects, most notably rents and income, interests are opposed. Some landlords are already experiencing mass rent arrears, while others are facing that prospect and the likelihood of default increases the longer the current social distancing measures remain in place.

Fundamentally, unless a rent suspension clause applies (which is unlikely), rent is still due whether or not the premises in question remain open. A failure by a tenant to pay therefore exposes it to enforcement action of some kind. Proactive tenants might be willing to investigate other ways of obtaining credit (e.g. by applying for a Government loan, if available) in order to avoid falling behind with their rent, but landlords cannot assume this will be done, nor indeed that payment of its rent will be the highest item on the tenant’s priority list.

Given the eviction moratorium introduced by the Coronavirus Act 2020 (which temporarily removes the landlord's ultimate remedy of re-entry in relation to commercial premises) and the Government’s plan to introduce further restrictions on landlord actions (see our article Government to provide further help to commercial tenants) parties are having to find more creative and less draconian ways of settling their differences.

Some landlords are in the enviable position of being able to agree rent free periods and suspend payments for their tenants. Others cannot risk doing this, for instance because of the knock-on effects on their own ability to service (and comply with the terms of) debts secured on the premises. In this respect, help may be on the horizon for struggling landlords during the next quarter, following the BPF’s efforts with the Treasury, but that has not yet been secured.

On both sides of the equation, parties face existential threats to their short- and long-term financial robustness. So, what are the options for landlords trying to work with their tenants, while also protecting their own position?

Potential actions might include drawing funds out of a rent deposit account, claiming from a guarantor or reviewing the terms of the landlord’s rent arrears insurance (and the tenant’s business interruption cover, if any), to determine whether a claim can be made.

Practically speaking, lots of landlords are trying to work with their tenants to get through this period, looking forwards to the time when 'business as usual' can resume on all sides. But what will that mean? It seems inevitable that we will undergo an evolution from emergency CV-19 measures into a serious recession and landlords and tenants need to balance short-term measures such as rent deferrals with managing their property interests in a recessionary environment. Failures to pay in the short-term will ordinarily mean an accrual of debt (which will attract interest) which will need to be paid in due course and which could become out of hand if a sensible strategy for repayment is not put in place. We strongly recommend that both sides seek legal advice before agreeing any such strategies or rent suspension arrangements.

For more information on this topic, please get in touch with Gemma Goddard, another member of the Commercial Property team, or a member of our Property Litigation team, to discuss your specific situation.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2020.



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