Section 82 of the Coronavirus Act 2020: The thin end of the wedge?

The Coronavirus Act 2020 is now in force and Section 82 of that Act effecting the postponement of the landlord’s right to forfeit for non-payment of rent is causing consternation amongst both landlords and tenants as they seek to navigate through these uncertain times.

Earlier this week the Property Litigation Association (PLA) attempted to establish some clarity as to the extent of the application of the moratorium by submitting to the Department of Housing, Communities and Local Government (“the DHCLG”) ten key questions[1]. The responses, which the DHCLG makes clear are not legal advice, but a clarification of the policy objectives, flag some important issues.

Firstly, the responses make abundantly clear that “rent” is to be construed widely and covers all outgoings under the lease. This means in practice that landlords are now not only being asked to forego their income streams for the next 3 months but also to fund all outgoings at the property. They will of course be able, as the Act stands, to enforce recovery of these costs after 30 June 2020, but this does raise potential cash flow issues for landlords over the next quarter.

Secondly, while the DHCLG has clarified that the policy objective is for the moratorium to cover all commercial leases, whatever their length of term and irrespective of whether they enjoy security of tenure protection under the Landlord and Tenant Act 1954, there is still a worrying question mark over the protection of headleases. The PLA asked if protection is available to tenancies where the tenant is not in occupation but there is somebody in occupation of the premises for the purposes of their business. This will of course be of particular pertinence to investment assets held on a long leasehold basis (such as shopping centres) where the headlease requires a fixed rent to be paid to the head landlord (e.g. local authority) but where the tenant holding that headlease is currently receiving little rent from the occupational tenants who are currently closed for business.

The answer from the DHCLG that “the policy objective is to cover all commercial leases with someone in occupation of the premises for the purposes of their business are protected” is not only poorly constructed English but also does not quite afford the complete comfort investment funds are likely to be looking for right now when it comes to payment of their next quarter’s rent when they have received little or no income to fund that quarter. Greater clarity is needed here as a matter of some urgency.

Further clarity is also needed as to whether the moratorium applies where both parties actually agree to the landlord exercising its right to forfeit for non-payment of rent, for example, where a surrender is undesired or where the tenant is insolvent and the administrator or liquidator has given consent to the landlord to forfeit under paragraph 43 of Schedule B1 or section 130 of the Insolvency Act 1986. The DHCLG completely sidestepped this query and have said it will depend on the facts of a given case.

However it was the response to the final question that is in greatest need of urgent clarification by the Government. PLA asked specifically for confirmation of whether there are any plans to extend the moratorium to the other landlord weapons of enforcement such as CRAR, winding up or debt actions. The DHCLG have refused to rule out any such extension saying that they are “monitoring the enforcement of non-payment closely” and keeping the issue “under review”.

Postponing a landlord’s right to forfeit for non-payment of rent is one thing, but completely removing all of a landlord’s enforcement tools would be a far greater and more draconian step. There are already suggestions that the Government may be taking through into law the reforms to wider insolvency law which were consulted on previously[2] and other signs that the Government will reviewing what further amendments to insolvency law may be required as the Coronavirus crisis develops. Concerns will inevitably be raised over rushed amendments to the insolvency regime and long term consequences. A balance will need to be found between the Government’s need to act quickly and preserve viable businesses through this crisis and ensuring the UK’s insolvency law remains coherent and clear.

We wait (at home, of course) to analyse any developments and bring them to you.

[1] http://41todw2i37w9c74zg3ndz7xp-wpengine.netdna-ssl.com/wp-content/uploads/2020/04/200330-Response-to-PLA-questions.pdf

[2] https://www.gov.uk/government/news/regulations-temporarily-suspended-to-fast-track-supplies-of-ppe-to-nhs-staff-and-protect-companies-hit-by-covid-19