COVID-19: the UK Government’s moratorium on enforcement of rent covenants in commercial leases by landlords

The Coronavirus Act 2020 came into force on 25 March. It imposed a moratorium on forfeiture of a commercial lease for a tenant's breach of the rent covenant.   

1. The moratorium will apply for three months but can be extended. 

2. Applies to England, Wales and Northern Ireland and Scotland.

3. Does not waive the obligation to pay rent, only prevents enforcement of that obligation by forfeiture. Rent is therefore due and will be an unsecured debt if not paid on time, and continue to accrue interest in accordance with the lease.

4. Applies to all business tenancies without the need to demonstrate any business disruption due to the virus.

5. Existing possession proceedings or orders will be delayed until after the moratorium.

6. There is no mention of (or therefore restriction against):

a) entering premises to seize the tenants’ goods in lieu of rent (Commercial Rent Arrears Recovery);

b) enforcing any rent security such as a deposit or a guarantor. A guarantor will be subject to a debt claim as per the tenant. Other rights under the lease such as requiring the guarantor to take a lease in its own name still apply; or

c) rights of the landlord as an unsecured creditor, such as putting in a winding up petition or applying to court to put the tenant into administration.

7. Enforcement will be possible as soon as the moratorium is lifted in respect of unpaid rent during the moratorium (the Act states that no conduct by the landlord shall be interpreted to waive their right to forfeit once the moratorium is lifted, save for an express waiver in writing). If tenants suffer a period of severely reduced revenue and are unable to pay rent during the crisis, they may need a lengthy period to repay the arrears once business returns to normal, which means the moratorium may need to be kept in place for an extended period. Landlords and tenants would be well advised to continue to negotiate a commercially acceptable rent reduction and repayment plan between themselves.

8. There is no mention in the Act of a similar moratorium against real estate lenders, preventing them from enforcing loan covenants where the borrower has not received rent. It is likely that financial covenants (and possibly material adverse clauses) will be breached if rent is not paid for a quarter or more. Including lenders in the moratorium is a logical step providing alignment throughout the real estate value chain and we understand landlords are lobbying for this.

9. Waiving rent or varying lease obligations is likely to require lender consent. Landlords should therefore approach lenders for approval of their strategy for negotiating a repayment plan.