As we pass the anniversary of the first UK lockdown and look towards the rapid easing of the third UK lockdown, the Government has been consulting on how to end the unprecedented tenant protections that were introduced by the Coronavirus Act 2020.
What are the current measures?
The current measures (discussed here) suspend the ability of landlords to exercise a right of forfeiture for non-payment of rent against a business tenant and restrict the use of Commercial Rent Arrears Recovery. Alongside these statutory measures, a new voluntary Code of Practice for commercial lettings was introduced (discussed here), which encouraged greater cooperation between landlords and tenants by looking for flexibility around rent payments. In early March, the statutory measures were extended until 30 June 2021 and the Code now includes a new annex to assist landlords and tenants in their discussions around rent and service charge arrears.
Rather than extending the current measures any further, the Government has indicated that after 30 June 2021 we will be moving into a period of transition. But what will this look like?
Today (4 May 2021) the Government closed its call for evidence from a range of stakeholders on six options for the exit from the current measures. The BPF (which will be submitting its own response) and other industry bodies have encouraged submission of responses from a broad range of parties within the commercial property industry and on this basis we have submitted our response to relevant questions.
The proposed exit options following 30 June 2021 range from a "drop-dead" approach that would see measures lapse without any phased support for tenants (Option 1) through to introducing a form of adjudication (non-binding or binding) between landlords and tenants (Options 5 and 6 respectively). The transition will not necessarily be linear and the options may be revisited again in the future: in the event that there is evidence within the property sector of a “substantial and ongoing threat to jobs and livelihoods”, the Government has stated that it “will not hesitate to intervene further”.
Options 5 and 6 are of particular interest, as the adjudication could take control away from the contracting parties with the adjudicator having power to alter the commercial deal between landlords and tenants. The list of potential remedies that could be available to adjudicators include the power to extend or reduce lease terms and reset future rent payable under the lease. There are both commercial and legal ramifications for each of these options which the government will need to consider.
These options have the potential to dramatically cut through long established aspects of landlord and tenant law with potentially unpredictable outcomes for both parties. Such uncertainty as to the terms of leases and rents payable could seriously impact the valuation of leased properties with impacts felt not only by landlords but also by lenders. We expect that options 5 and 6 might be resisted by landlords, investors, pension funds and the wider property industry. It is equally unclear how the potential remedies in an adjudication scenario would work for tenants. It is essential for confidence in the commercial property market that landlords and tenants can rely on the fact that the terms of leases will remain binding and cannot be changed unilaterally.
Alongside legislative proposals, we have seen a wide variety of privately agreed steps taken by landlords and tenants in anticipation of tenant difficulties meeting pre-Covid commitments. These have included:
- simple side letter agreements to change rent payment frequency, such as monthly rather than quarterly rent payments;
- the introduction of mid-term incentives, such as new rent free or half rent periods;
- temporary variations of rent provisions, such as a reduction of the base rent together with the introduction of an additional turnover rent; and
- complete regearing, for example the surrender of a floor of office space in exchange for the removal of a tenant break right or other long-term commitment to the space.
These changes, more often than not, require lender approval and, less often, superior leaseholder approval. Where tenants have exited, we have noticed a greater range of meanwhile uses for vacant property and a greater focus on turnover rent returns. Some of the trends are unlikely to be fully visible for some time, as Land Registry application times have slowed dramatically.
Watch this space
It will be interesting to see the initial responses to the Government’s consultation: there is a clear fork in the roadmap out of the Covid 19 forfeiture moratorium between a return to the well-established forfeiture regime and the introduction of a radical new normal.