How does Covid-19 affect rented property?
Rent holidays and temporary rent reductions
The approach of the government has been to encourage flexibility on the part of landlords and motivate them to have open and transparent discussions about the payment of rent. Tenants will be remain liable for rent throughout the Coronavirus pandemic and should continue to pay if they can (rather than postpone the problem until later) but cash flow may make it necessary to agree a rent holiday or temporary rent reduction.
The Coronavirus Act protects landlords by preserving their right to forfeit the lease later for non-payment of rent which has been subject to a rent holiday where that rent has later become due but remains in arrears.
Landlords do need to be careful because the Coronavirus Act does not apply to every commercial lease – there are important exceptions. Clarity of communication is crucial and prudent landlords and tenants will record their agreements in writing. Landlords should take care not to use words which might lose them the right, preserved by the Act, to forfeit for arrears of rent if they are not paid once the rent holiday is over.
If you are the landlord of rented property which is subject to a mortgage, you might want to contact your lender to discuss the possibility of a mortgage holiday to coincide with any rent holiday you might wish to agree with your tenant. At the same time, you may wish to contact your accountant or HMRC about the possibility of deferring your tax liabilities (including VAT where applicable) which might help your cash flow when you are granting rent holidays.
Taking action for non-payment of rent
The main protection for tenants under the Coronavirus Act lies in the imposition of longer notice periods and a prohibition on forfeiture and re-entry of commercial premises.
Any court actions for repossession are being stayed for 3 months including those which had already been issued prior to the Coronavirus Act. An alternative to a repossession claim is a simple debt claim for the arrears of rent. Obviously such an action will not lead to recovery of the premises but it may lead to a judgment for a sum of money which can be enforced against the tenant in the usual way. The main advantage is that a debt action will not be subject to the protections which tenants enjoy in relation to possession actions i.e. longer notice periods and a stay of any proceedings.
Where the courts have a discretion in relation to repossession and forfeiture, they are bound to take particular account of the impact of Covid19 and the extent to which rent arrears are due to the pandemic.
- Commercial: In the case of business leases, the tenant will generally have an opportunity to apply for relief from forfeiture, either where the landlord has already forfeited the lease and taken the premises back (not possible during the Covid19 pandemic) and the court will have a discretion about whether or not to grant relief. In normal circumstances, any tenant who is able to pay off the arrears or demonstrate that they will be able to do so within a reasonable time is likely to be granted relief. At the moment, relief is likely to be granted in any case where Covid19 has had a significant impact on the tenant’s business, which will generally be the case.
- Residential: Different rules apply to residential property. Possession claims are divided into mandatory grounds and discretionary grounds. In relation to rent arrears, possession is mandatory where the arrears are over 2 months but discretionary where they are not. As in commercial cases, the court is very likely to exercise its discretion against granting possession in any case where Covid19 is a factor.
After initially taking a very firm line on all rent cases, the courts have recently softened their approach slightly. For example, the early guidance indicated that even squatters (who in law are classed as trespassers) would be protected from eviction orders but the position has now changed and where the property owner uses the accelerated possession procedure and there are no good grounds for adjourning the proceedings or granting relief, possession is likely to be ordered.
There are alternatives to court action including a negotiated surrender on terms as to rent arrears which might provide a quicker and ultimately more satisfactory result. The solvency or otherwise of the tenant may be an important factor. We can advise on the possibilities.
How are the Landlord’s obligations affected?
Basically, the landlords obligations under the lease or tenancy remain unchanged. The protections of the Coronavirus Act are for the benefit of tenants, not landlords. This means that an obligation, for example to carry out gas safety checks, will remain in place and the social distancing rules present a challenge but not an excuse for inaction.
We are seeing action being taken by tenants against landlords for breaches of the landlords obligations.
Landlords may wish to look at their insurance policies to see whether they have cover for non-payment of rent. Ultimately the answer will depend on the wording of the particular insurance policy and unfortunately loss of rental income due to Covid19 is not often covered.
The position is slightly different for this sector. Our specialist social housing team can advise you.
How can Tozers help?
Last updated on 23/04/2020