COVID-19: The quarter day conundrum

The next quarter day rent payment falls due this week, on 25 March 2020 and commercial occupiers/tenants are facing a conundrum, with stores closing and businesses substantially affected:

  • Can they afford to/do they pay this quarter's rent?
  • Should they look to agree with their landlords a payment holiday (a deferral), for say a quarter and if so on what terms?
  • Do they try and persuade their landlord to agree a temporary move to monthly rent payments, and if so on what terms?

The most pressing risks for commercial occupiers considering withholding rent this week are:

  • Forfeiture by peaceable re-entry.
  • A landlord presenting a winding up petition.
  • A landlord using CRAR to seize goods.

Whilst in many cases, landlords will have no interest in forfeiture either because (1) it would not be the right thing to do in the midst of this crisis and/or (2) they will not be able to re-let the premises, some landlords may look to take advantage of the situation to repossess properties that have, say, longer term development potential.

Does a tenant have any lawful excuse for a rent suspension or even terminating its lease?

The arguments are largely untested but we may see the following from tenants:

  • That its lease has been "frustrated" due to an enforced closure;
  • Where a landlord insists that the tenant's premises is closed due to Covid-19, that the landlord has derogated from its grant;
  • That it can rely on a rent cesser provision, suspending the obligation to pay rent as a result of an insurable event.

And can a tenant pay the rent but look to claim on its business disruption policy?

As ever, so much will depend on individual circumstances and wording, whether in the tenant's lease or the relevant insurance policy.

What is happening in practice and what should you do?

In the last week, we have seen several letters from major retailers simply informing their landlords that they will not be paying the next quarter's rent – so not even asking for permission.

There are obvious risks with this approach, as above – and it may be better to agree rent holidays or monthly payments. We've prepared template agreements for both scenarios which have been used in the last few days. It is important that these letters are drafted carefully to avoid unintended consequences for either party and unwanted claims or costs. They also need to be consistent with parties' financing arrangements and carefully address the terms upon which the temporary arrangement ends – bearing in mind the uncertain future.

But if no agreement is reached, what happens next? There are means to resist forfeiture by peaceable re-entry (by someone physically occupying premises and resisting possession) and most leases will not permit forfeiture until 14 or 21 days after 25 March, so in effect early/mid-April.

This begs the question: during this period, will the Government step in and suspend forfeiture and insolvency proceedings for say the next 3 months? We shall see, but watch this space.