Updated: 4th May 2020
Government legislation has been introduced which prevents landlords from issuing winding up petitions or statutory demands against their tenants in the event that they fail to pay their rent in full or on time. The only exception is if landlords can demonstrate that the non-payment is not caused by the ongoing coronavirus pandemic, however, when almost every business has been affected by Covid-19 in some way, this is likely to prove extremely difficult to prove.
Instead tenants have been permitted to pay what they can afford during this time, free from the threat of eviction or other legal action being taken against them. These rules will initially apply until 30 June 2020, although the possibility of this being extended has been left open by the government. Commercial Rent Arrears Recovery (CRAR) can also not be actioned unless the landlord is owed a minimum of 90 days unpaid rent.
This builds upon the emergency legislation regarding lease forfeiture which was previously introduced to protect tenants. Like the new ruling on winding up petitions and statutory demands, suspension of forfeiture rights is scheduled to remain until at least the end of June.
These rules have been designed to protect businesses as they navigate these uncertain times, yet the fallout could be devastating for commercial landlords who are equally struggling to run their business during this time.
With many businesses currently generating zero revenue, landlords across the country are facing the prospect of previously reliable tenants now finding themselves in the position where they are unable to make even a token contribution towards their rent for the foreseeable future.
Tenants will still be liable to make good any missed rental payments, which in theory means landlords should not miss out. The reality however, is likely to be much different. Firstly, the cash flow of landlords will take a severe hit if a large proportion of tenants are unable to pay their rent over the coming months. Secondly, even though tenants will be expected to clear any arrears built up during this time, the unfortunate fact is that many businesses will struggle to do this until business picks up considerably.
In an ideal world, landlords and tenants would work together to come to a mutually agreeable payment plan which satisfies the landlords need for payment, while also balancing the fact that the tenant may well be operating with severely reduced income. This may involve temporary flexibility on the portion of rent collected, while for others, negotiations may focus around arranging a more long-term rent reduction.
While landlords will be understandably keen to ensure tenants clear their arrears, chasing too hard or too aggressively risks the future viability of the tenants’ business.
If financial pressures or legal action forces the tenant out of business completely not only will this mean the landlord is unlikely to recover the arrears which have already built up, but it also puts them in a difficult position going forward should they be left with vacant properties, properties which are likely to be difficult to fill if the economy doesn’t bounce back. Some landlords, particularly those renting premises to retailers and those in leisure and hospitality could find themselves in real trouble if government-enforced lock down or social distancing measures continue to affect these industries.
The longer this situation goes on, the more unlikely it is that businesses will be able to ride out the storm. Taking a cut in the rent collected now allowing these businesses to preserve cash flow rather than initiating formal recovery and/or legal action, could pay dividends in the long-term for both tenants and landlords alike.
However, this is easier said than done, particularly from the point of view of landlords. Landlords have costs of their own which in many cases can only be met if their tenants pay the rent due. Many will simply not be in the position to affordably accept months of reduced rental income, leaving very little option once the three-month window expires.
If you are a tenant, or a commercial landlord, and you are experiencing financial pressure as a result of Covid-19, it is vital you seek professional advice as a matter of urgency. With over 70 offices located across the country, Real Business Rescue’s team of business rescue and recovery experts have been helping limited company directors navigate periods of financial distress for over 30 years.
Enlisting the help of a licensed insolvency practitioner can help you understand your options and allow for plans to be put in place to secure the future of your business. Call our expert team today on 0800 644 6080 for immediate support and guidance.
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