Update – The Coronavirus Act 2020 – Residential and Commercial Tenancies

Residential and commercial leases alike have been and will continue to be affected by the coronavirus outbreak.

The government’s response, in the form of the Coronavirus Act 2020 (“the Act”), received royal assent yesterday evening, 26 March 2020.

Sections 81 and 82 relate to residential and business tenancies respectively and this note aims to highlight what steps have been taken by the government as well as some of the issues which parties to a lease will likely need to consider over the coming months.

Residential Tenancies

The main step taken by Section 81 of the Act is to place restrictions on the ability of residential landlords to recover possession of residential premises.

Section 81 introduces Schedule 29 which makes provision about notice periods in relation to possession proceedings in respect of certain residential tenancies.

In the main, the notice which a landlord must give to a tenant before being able to commence possession has been extended to at least three months.

In particular:

• Section 8 Housing Act notices (where possession is sought on the basis of rent arrears under grounds 8, 10 and 11), proceedings cannot be commenced until at least three months after the notice was served.
• Section 21 notices must also now also give three months’ notice before proceedings can be commenced.

These changes will apply to all notices issued after the commencement of the Act and will apply for the relevant period, which is defined as the day after the Act is passed and ending on 30 September 2020.

The provisions do not apply to licences, contractual tenancies and tenancies granted in the course of employment. There is not yet any restriction on the recovery of possession against trespassers.

The three-month notice period requirement may be extended by the Minister for any period up to six months.

At present, the Act does not apply to notices already served prior to the commencement of the relevant period, which remain valid and so existing proceedings are not restricted by the Act.

However, as of Friday 27 March 2020, the new Practice Direction 51Z is in force which makes provision to stay proceedings for, and to enforce, possession. All proceedings for possession brought under CPR Part 55 and all proceedings seeking to enforce an order for possession by a warrant or writ of possession are stayed for a period of 90. The PD ceases to have effect on 30 October 2020.

The latest government guidance on the position can be found here.

Commercial Tenancies

Section 82 of the Act addresses business tenancies and provides protections for forfeiture for non-payment of rent. The protection will apply:

• Provided the tenancy is a ‘business tenancy’ as defined in Part II of the Landlord and Tenant Act 1954; and
• For the ‘relevant period’ which runs from 27 March 2020 until 30 June 2020.

The Act provides that during the above period a right of re-entry or forfeiture for non-payment of rent may not be enforced, by action or otherwise (ie peaceable re-entry). Further, nothing short of an express waiver in writing will be regarded as a waiver by the landlord of a right of re-entry or forfeiture for non-payment of rent.

‘Rent’ is broadly defined under the Act to include any sum a tenant is liable to pay under a relevant business tenancy.

Unlike the provisions which relate to residential tenancies set out above, Sections 82 applies to existing proceedings which commenced before the relevant period in respect of non-payment of rent:

• Neither the High Court nor the County Court may, during the relevant period, order possession to be given before the end of the relevant period (S.82(4) & (8)).
• Where the High Court has already made an order for possession on terms (such as the payment of all outstanding rent arrears by a certain time) and the tenant applies to vary that order, the court must, when dealing with the application, ensure that the tenant does not have to give possession before the end of the relevant period (s.82(5) & (6)).
• In possession proceedings in the County Court under subsections 138(3) and (4) of the County Courts Act 1984 the court may not specify any period for possession to be given which expires during the relevant period (s.82.(9) & (10)).

Significantly, for the purposes of determining whether the ground mentioned in section 30(1)(b) of the Landlord and Tenant Act 1954 (persistent delay in paying rent which has become due) is established in relation to a relevant business tenancy, any failure to pay rent under that tenancy during the relevant period (whether rent due before or in that period) is to be disregarded (s.82(11) of the Act). This appears to remove the need for a tenant to demonstrate a causative link between the persistent delay and the current crisis and is likely to be the subject of disputes after the current crisis has abated.

Other Considerations

The Act does not mean that tenants do not have to pay rent for the relevant period, only that the landlord’s right to forfeit the lease for non-payment of rent is frozen during that time. Tenants will remain liable for their rent during the relevant period and any default interest provisions in a lease are unaffected. Further, tenants are not protected from possession being sought due to other breaches of a lease, such as disrepair.

There is nothing in the Act in relation to Commercial Rent Arrears Recovery (CRAR) which remains an option for landlords to explore as well as looking to any guarantors who are in place.

Given the current uncertainty, landlords are likely to prefer to hold onto existing tenants rather have to find new ones, at least in order to preserve future rental income. Tenants who look to terminate their lease using a break clause will also need to be mindful that the terms of a break clause are strictly interpreted and tenants will still be bound by break periods, the requirement to give vacant possession, payment of rent up to the break and any other covenants which may be included within the lease. As such, complying with their obligations under such clauses at the present time may not be possible.

Tenant Insolvency

Landlords should be mindful of how their position will be affected should their tenant company become insolvent:

• The usual remedies of suing for outstanding sums, forfeiture and CRAR are likely to be of little use to a landlord whose tenant is facing insolvency at the moment.
• In the case of companies who enter CVA or a form of administration, the landlord will not generally be able to pursue any action against the tenant without permission from the court.
• In the case of winding up or liquidation (and CVA), a landlord is likely to only receive a proportion of what is owed to it, together with any other creditors which the tenant may have.

Finally, questions surrounding Force Majeure and frustration are likely to become highly topical but will be the subject of a separate note.

The government retains the power to extend the restrictions in the Act in relation to both residential and commercial tenancies over the coming months and updates will be provided as and when those powers are exercised.