In the last few days Carluccio’s and Brighthouse entered administration and became two of the most recent casualties of the high street. The timing of their collapse perhaps says less about the impact that coronavirus will have on the economy and more about the already fragile state of the leisure, hospitality and retail industries. With the possibility that all 73 Carluccio’s restaurants and 240+ Brighthouse stores have closed for good, it could not be clearer that help was desperately needed to brace for the impact of coronavirus.
The Government recently implemented unprecedented measures to protect the public and the economy during this period of disruption. A moratorium has also been imposed by the Coronavirus Act 2020 to prevent most landlords of commercial premises from evicting tenants who have failed to pay a sum due under the lease.
Most leases provide that where a tenant of commercial premises fails to pay rent, the landlord will be entitled to re-enter the property to evict the tenant and change the locks. This is a process which is known as forfeiture. It serves as a powerful incentive for tenants to pay because a business which has been evicted can seldom trade profitably without premises. However, now that landlords no longer have the power to end leases for non-payment before 30 June (though this period is subject to review and may be extended), a large number of commercial tenants have deliberately withheld their latest rent instalments in order to retain cash in the bank and help see their own businesses through the initial period of disruption.
It is important for owners and occupiers of commercial premises to be aware that:
- Not all tenants will be protected by the moratorium. Some occupiers, such as licensees of serviced office accommodation and short-term occupiers (who occupy under tenancies at will), are excluded. So too are agricultural tenants and tenants under less common leases in the mining and telecommunications industries.
- Where protection does exist, it extends to prevent eviction for non-payment of rent, service charge and insurance (where applicable).
- The moratorium does not operate as a ‘windfall’ or rent free period for tenants. Where sums have not been paid, tenants remain liable for them, interest will accrue and landlords still retain the ability to sue their tenant for the money or force the tenant company into insolvency (not that those courses of action will necessarily yield more prompt payment of the debt).
- Once the protection ends on 30 June, landlords will be able to commence forfeiture action in respect of the missed payments.
It is therefore crucial that tenants regard any protection under the Act as nothing more than a temporary reprieve. The consequence of deferring payments is likely to impact heavily on cash flow later in the year, and landlords who have had their own cash flow impacted can be expected to call in the debts quickly.
It isn’t all doom and gloom, though. We have been able to help owners and occupiers of commercial premises identify that it is possible to achieve a compromise which may substantially help each of them now and in the months to come. Landlords are keen to maintain their income but tenants don’t want to pay out large sums of rent every quarter. If a tenant is in a position to do so, it may be advantageous to seek to agree alternative payment terms – for instance, in return for continuing to pay rent through to 30 June (or beyond!), the landlord may wish to accept smaller but more frequent payments of rent until long after normal service has resumed so that both parties are in a better position to bounce back.
At Bevan Brittan, we have launched a Covid-19 Advisory Service offering advice and information on numerous aspects of the crisis and how it affects organisations. Please don’t hesitate to contact me or another member of the Bevan Brittan team if you would like to discuss any issues impacting your business.