Commercial rent arrears due to Covid

The government has recognised the devastating impact that the Covid 19 situation has had on the commercial property sector, particularly in retail.

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The government has recognised the devastating impact that the Covid 19 situation has had on the commercial property sector, particularly in retail. The almost overnight closure of thousands of retail outlets led to a catastrophic fall in the income of commercial tenants which of course had a direct impact on the tenant's ability to pay their rent. This of course had the knock-on effect on the commercial landlords.

Early in the pandemic, the government introduced various financial packages to try to support the sector where possible, including guaranteed business loans and the Coronavirus Job Retention Scheme, commonly referred to as the 'furlough' scheme. The government also introduced a moratorium on forfeiture of commercial leases and changes to commercial rent arrears recovery statutory demands and winding up petitions.

In addition, the government set out a Code of Practice for commercial property relationships during the Covid 19 pandemic. The purpose of the Code was to try to encourage business landlords and tenants to come together to negotiate affordable rental agreements. However, it was also made clear that those tenants which could make rental payments were expected to do so.

The first case involving tenant liability to pay rent during Covid 19 has been heard. The owner of Westfield shopping centre sued The Fragrance Shop for non-payment of rent which had accrued during the lockdown period. Unsurprisingly, The Fragrance Shop put forward a number of arguments to defend its position all of which were linked to the situation brought about by the pandemic.

Interestingly, the court concluded that the landlord had not ignored the Code of Practice and had actively tried to avoid court proceedings.  Amongst other things, the court also looked at the terms of the lease between the parties relating to the suspension of rent clause. The lease provided that the tenant could lawfully suspend rental payments when there was 'physical damage' to the property. In this case, there was no physical damage; the premises were closed due to a legal requirement, that is, the requirement of the government to enter lockdown.  The court was not prepared to interpret the lease in any other way. Thus, the court held in favour of the landlord.

The finding relating to the clause in the lease will be of interest to landlords and tenants when entering into new commercial leases. They and their legal advisers will no doubt wish to look very carefully at the terms of the rent suspension clauses in new leases to ensure that the provision applies in the event of the premises having to close due to a legal requirement. Whilst this was no doubt a completely unthinkable situation when the lease in the present case was first drafted, many would agree that we are unlikely to have seen the last of government imposed lockdowns.

To discuss this or any other landlord tenant matter, contact us.

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