Paul Hinchliffe, associate at commercial property solicitors, Nelsons, has been approached by landlords asking for advice on how they can balance their own books while their tenants are struggling due to enforced closures.
Paul said: “A lot of landlords are finding they have to accept the current situation and hope it doesn’t take too long to clear. However, commercial landlords need rent money to keep their own businesses afloat, so we’ve recommended that, while landlords should accommodate rent reductions, they should continue to demand rent in the usual way, while refraining from waiving their right to collect unpaid rent at a future date.”
Where a company cannot pay its bills due to the coronavirus, the government has temporarily banned the use of statutory demands (made between 1 March and 30 June 2020) and winding up petitions (presented from Monday, 27 April to the end of June). The government has also introduced secondary legislation to provide tenants with more breathing space to pay rent by preventing landlords from using Commercial Rent Arrears Recovery (CRAR) – unless they are owed 90 days or more of unpaid rent.
Paul has also laid out the steps that landlords can take in order to manage cash flow during the coronavirus pandemic.
1: Check your rent roll
This is a critical source of information and it’s important to review your rent roll at an early stage and ask these sorts of questions:
What is the make-up and mix of the rent roll? It is likely that retail and leisure tenants are going to be hardest hit, so prioritise monitoring those tenants; Identify patterns. Can you tighten up collecting rent in line with payment terms from those tenants who do pay but pay late to help cash flow? Do you have tenants who are already in debt? Have you let things slip and need to make a choice about whether you call debts in more formally, or consider speaking to a solicitor about what action you can take? The longer debts are allowed to build up, the harder it gets to fully recover.
2: Review your lease arrangements
It’s worth checking your documents or speaking to your solicitor to consider each lease and the terms of them, or associated documents that go with those leases. Consider:
Are your tenants companies or individuals? Companies may be more immediately at risk of insolvency events, so you may want to prioritise debt collection from those tenants.
Do any of the leases have guarantor provisions? You may be able to call on an individual to pay the rent if the tenant does not. Do you have a rent deposit you can call on? Most modern rent deposits provide for a deposit of somewhere in the region of three months, which might provide a short-term solution where a tenant is struggling to pay rent.
3: Talk to your tenants
They’re your source of income, it’s likely you’ll have a pre-existing relationship with them and they will probably be just as nervous and uncertain as you are about the future. Can you reasonably provide some assistance? Perhaps in the form of:
Moving payments from the usual quarter days to monthly arrangements to assist tenants with cash flow (in the form of a side letter); or a short-term rent deferral until the worst effects are behind us. It’s worth picking up the phone to have an honest discussion about the current circumstances to help inform your decision making.
4: Talk to your bank
If your rent roll is important for servicing a loan or facility, you may want to contact your bank/bank relationship manager at an early stage to discuss what the bank can do to help you. They may have options available, such as payment holidays, for businesses most at risk.
5: Talk to a solicitor
They may be able to assist you in reviewing your leases and contractual arrangements with tenants and give you pragmatic and commercial advice about the options open to you to deal with the developing situation.
Transactional solicitors may, for example, be able to advise you that you have a landlord break option coming up in the near future that might be worth triggering to obtain a vacant unit from a tenant. Property litigators may also be able to advise you on the formal steps you can take to recover rent.
6: Pause
Once you are armed with information and options, pause. The situation is unprecedented, and it could be too soon to make decisions about the future of your property portfolio and tenants. It could be that you are able to offer tenants time and support so that your properties remain occupied.
Emergency legislation has already come into effect that gives tenants business rates relief, access to cash grants and loans to help ease the burden and free up cash for them to pay rent. This may continue to develop further to include formal rent holidays.
Paul adds: “While landlords are urged to give their tenants the breathing space needed, the government has called on tenants to pay rent where they can afford it or pay what they can in recognition of the strains felt by commercial landlords too.
“Under these measures, any winding up petition that claims the company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of Covid-19.”
