Many pub and restaurant tenants failed to pay their rent on the March quarter this year because of the Covid-19 pandemic. Restaurants were subsequently closed by the Government. Closure is mandatory and enforced by criminal law. Here we draw on our recent experience of how some landlords in the hospitality sector are seeking to enforce rent obligations and the options open to you as a tenant in response.
Can you suspend your rent payment during the Covid-19 closure?
It was the Government, not the landlord, that forced the closure of your outlet and therefore your lease, including your obligation to pay rent, is a contract that remains in full force. Your landlord is, on the face of it therefore, entitled to enforce the debt.
In our view, assuming the landlord has not in some way prevented access to your premises, you would not have a claim for breach of covenant for quiet enjoyment because it was the Government and not the landlord who closed your premises.
You would need to look at the specific clauses of your individual lease to find assistance with a rent suspension. However, in most cases there will not be a force majeure clause and often rent suspension provisions will not apply to Covid-19 in any case.
Some commentators argue that the Coronavirus restrictions have deprived you of your use and occupation of the premises, fundamentally changing the nature of your contract. A court might decide that both you and the landlord have been relieved of obligations under the lease during this temporary period of time when it would be an illegal use of the property to continue to trade. In this case, it might be argued the rent obligation would be suspended. This is an untested and complex argument that relies on wartime caselaw and would require specific legal advice.
What can your Landlord do to enforce your rent obligation?
We have seen this mechanism used over the last few weeks by landlords as a way of putting pressure on tenants to pay their rent.
A landlord can serve a statutory demand on its tenant. If this is not satisfied (i.e. rent is not paid) within 3 weeks of serving the demand, the Landlord can present a winding-up petition at court. Once a winding-up petition has been issued, it must be advertised in the London Gazette. This could have a catastrophic impact on a tenant’s business.
Can you stop a landlord applying for a winding-up petition?
If you are a company, you may be able to apply for an injunction to prevent a landlord from either presenting a winding-up petition or, if one has been issued, preventing the landlord from advertising the petition. One of the grounds we have been advising on to challenge a statutory demand is that it is an abuse of process.
Does your landlord want to force you into liquidation?
You may be able to argue that it is unlikely that the landlord genuinely wants to put the company into liquidation. If, coronavirus aside, you are a significant company with a healthy balance sheet, ordinarily expected to pay your rent for a long period under the lease – in short good covenant strength, then it is unlikely that a landlord will want to lose you as a tenant. A liquidator may disclaim the lease and leave the landlord with an empty property which the landlord would likely struggle to fill in the current climate.
What should you do if you receive a statutory demand?
We have been advising clients over the last few weeks on their options when served with a statutory demand including:
- Initial responses to landlords;
- Requesting the landlord to provide undertakings to withdraw the statutory demand and that no winding-up petition will be presented without giving the tenant adequate written notice;
- Advising on injunctions if the undertakings are not provided; and
- Negotiating reduced rent with a landlord in return for not operating the break clause where there is one in the lease.
When might a Court hearing be held?
If you successfully apply for an injunction to prevent a winding-up petition from being presented then the matter will be listed for a full hearing to decide on the merits of the application. From what we understand the Insolvency and Companies Court is now listing into July, which might buy valuable time for tenants wanting to minimise expenditure while outlets have to remain closed.
Will the Government step in?
In the same way as legislation now prohibits forfeiture by landlords until 30 June 2020 we wait to see whether the Government will legislate to prevent statutory demands being issued (for a period of time) to put pressure on tenants to pay rent.
Can a landlord send the bailiffs in? CRAR can technically be exercised, but it may be of limited practical use to landlords if your outlet is closed.
The Commercial Rent Arrears Recovery Procedure (CRAR Proceedings) enables Landlords of commercial premises to recover rent arrears from tenants by seizing their assets without going to court. The Landlord must give 7 clear days’ notice of the intention to enter. If the rent still remains unpaid after 7 days then a Certificated Enforcement Agent can enter the premises to seize goods. However, they can only enter through an open or unlocked door or through other usual means of entry. Where premises are closed due to Coronavirus they would not be able to force entry in order to seize goods under CRAR without a Court order.
A landlord might seek to serve a s.146 notice (Law of Property Act 1925) if it wishes to commence forfeiture proceedings against you for a breach of covenant other than to pay rent, e.g. a keep open clause. The notice will give you a reasonable period of time to comply with its requirements. However, the landlord will not be able to obtain an injunction requiring you to “keep open” as opening is currently prohibited by law and statute prevails. In addition, all proceedings for possession are stayed for a period of 90 days from 27 March 2020. Therefore, no possession claim can proceed until 25 June 2020. This supplements the moratorium on forfeiture based on non-payment of rent that was introduced by the Coronavirus Act 2020.
Tenants should negotiate with landlords to agree a way through the pandemic e.g. rent holiday or monthly rent where possible in order to avoid costly and protracted litigation.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.