LANDLORDS AND LEASEHOLDERS. WHAT IS FACT AND WHAT IS FICTION IN COVID 19 TIMES?
LANDLORDS & LEASEHOLDERS IN COVID 19 TIMES. WHAT IS FACT AND FICTION? IT’S A FRIGHTENING AND FRUSTRATING TIME FOR EVERYONE DUE TO THE CORONA VIRUS AND ITS KNOCK ON EFFECTS.
Whether you are a commercial tenant running a shop, a commercial tenant in an office, or a residential leaseholder in a private home. What’s going on for you, your landlord and managing agent right now?
PART ONE: COMMERCIAL LEASES
As someone renting a commercial property, you will obviously have some responsibilities that you need to adhere to and of course will be dependent upon what’s in your lease. Your lease will also tell you who manages the property. A key piece of legislation to remind yourself of is if you are taking on a commercial premise then it will be under the Landlord and Tenant Act.
Always check the premises’ commercial classification (or planning use):
- A1– Retail premises i.e. shops, hairdressers, travel agencies, funeral homes, sandwich bars and more
- A2– Professional and financial services i.e. banks, solicitors and estate agents
- A3– Establishments where customers buy and consume food and drinks on the premises i.e. cafes and restaurants.
- A4– Drinking establishments i.e. pubs and bars (but not night clubs)
- A5– Hot food takeaways
- B1– Business use i.e. offices or research and development facilities
- C1– Hotels, hostels, boarding houses and guest houses
- C2– Care homes, schools, colleges and training centres
It’s clear that so many of these classifications have been affected through Covid, and if you are thinking to adapt your business to something that can work in terms of openings times and people coming in, there are ways of requesting planning permission from your local authority to have a classification changed…it just might take a while and there’s no guaranteeing.
Like any contract, you need to ensure you read it properly (again, ask a property lawyer to check this over for you, we will be more than happy to assist) and know the length of the lease you are signing into. Leases are like fingerprints…never 2 the same, and they can be negotiated. Why negotiate? Well it could be that you’re a new business and the lease term isn’t viable or you’re nervous, so you could chat about a break clause or the possibility to sub-let.
In general terms, this legislation gives tenants in commercial properties security of tenure after the lease term is finished; meaning that, even when your contract is up, you have the right to stay in the property and apply for a new lease so you can remain there.
In short, your landlord can’t simply kick you out unless they need the property back for a good reason, or you’ve a history of not paying rent on time or refusing to meet lease conditions…and this doesn’t mean within the history during Covid 19 – this is exceptional.
We would always recommend you hire a specialist property law and leasehold expert solicitor or lawyer to talk you through your lease and payment conditions before you sign on the dotted line. Peter and Matthew from LMP Law are exceptional in this regard.
RENT FREE PERIOD
What’s a RENT FREE PERIOD in “normal times”? In previous years there have been good reasons why a landlord might offer a rent-free period; from giving an incentive for you to sign the lease in the first place to compensating you for any additional works and repairs that need to be done to the property (and because of these repairs the landlord would be aware there could be a loss of business to you).
Remember, if the landlord (in “normal” times) offers you a long rent-free period it may be that the eventual rent could be hiked up….don’t agree to anything without checking what future problems or extra fees may arise.
As a commercial landlord’s agent you should ensure you meet the objectives that you agreed with your client at the beginning of any instruction, “particularly the provision of quality services which are value for money” [Source: RICS].
The overall objective for a property manager is to act as an agent for the landlord to manage:
- a) some or all of the responsibilities the landlord has
- b) some or all of the landlord’s responsibilities regarding laws in owning or operating a property
COMMERCIAL : SERVICES CHARGES
Service charges are typically either:
- A fixed charge: This will be a pre-set percentage of all the costs the landlord expects to pay for the whole building; or a
- A proportional charge: Perhaps the fairer option, a proportional service charge considers your section of the building as a certain proportion of it, and charges you accordingly.
COMMERCIAL RENT ARREARS RECOVERY (CRAR)
What happens with non-payment of rent?
Under the Coronavirus Act 2020 the Government has temporarily banned forfeiture (that’s eviction in non-legal speak) for non-payment of rent. Landlords have been left with a limited range of options to try and recover any unpaid rent, when normally they could fall back on:
- Rent deposit
- Issuing debt proceedings
- Commercial Rent Arrear Recovery (“CRAR”)
- Winding-up petitions
WHAT IS CRAR?
Commercial Rent Arrears Recovery is more widely known as CRAR. This is a law that enables landlords to collect rent owed to them by the tenant by taking goods from the property. CRAR came into effect in April 2014 and its aim was to give landlords more power to retrieve unpaid rents on their commercial premises.
WHAT’S HAPPENING IN COVID 19 TIMES?
The Government is laying down legislation to provide commercial tenants with more breathing space to pay rent by preventing landlords using the CRAR… unless the tenants owe more than 90 days rent.
HOWEVER, the Government is asking for tenants to try and pay the rent where they can afford it,
“….or what they can in recognition of the strains felt by commercial landlords too.” The Government confirmed, it is “working with banks and investors to seek ways to address [the very serious pressures on landlords] and guide the whole sector through the pandemic”.
From our perspective as property lawyers, we urge all parties involved to really communicate with each other. Burying your head in the sand will help no-one.
WHAT CAN COMMERCIAL LANDLORDS DO?
The Corona Virus Act provides that in any existing proceedings there can be no order for possession until 23 August 2020 (this was an extension announced on 5 June 2020). However, despite sections 82 and 83 of the Act, forfeiture by peaceable re-entry would still be available to a landlord for breaches unrelated to non-payment of rent or other sums due.
PART TWO: RESIDENTIAL LEASE
As the latest government guidelines say:
“Tenants have a right to a decent, warm and safe place to live. Where safe to do so, it is in the best interests of both tenants and landlords to ensure that properties are well maintained, kept in good repair and free from hazards. Recent changes to guidance on working safely mean that landlords can now take steps to address wider issues of repairs and safety inspections, provided these are in line with public health advice.”
As a reminder of what a leasehold tenant is, it’s someone who owns their home (usually not a house) under a long-lease, rather than a rental tenancy. Most leaseholders own a flat or a place with communal amenities (e.g. garden, stairs, parking). These flats will be managed by the Landlord (or freeholder)’s allotted agent. As a leaseholder you have certain rights and again, the main thing before entering the contract of living there is to READ THE LEASE!
As a tenant, you have the right to:
- get information about service charges or insurance
- know the landlord’s (freeholder’s) name and address
- be consulted about certain maintenance and running costs
- challenge certain charges under some circumstances
Most property lawyers and conveyancers will advise you against buying a lease that has hardly any term left on it. Most buyers will have great difficulty in purchasing a flat with such a short lease (we’re talking less than 70 year) because most mortgage lenders won’t lend.
Therefore assuming you own a flat with a long lease and you are concerned that the lordlord will end the lease and evict you, please know this is very rare. However, there are some circumstances and leases that let them do this; often called ‘forfeiture proceedings’. They need to send you a formal written notice and get the court’s permission. In times of Covid, the government is doing its best to protect against forfeiture.
When the lease runs out (even without Covid)
You don’t have to leave the property when the lease expires. In law, a lease is a tenancy and the leaseholder is a tenant. The tenancy will continue on exactly the same terms unless you or the landlord decides to end it.
The majority of mortgage providers have offered 3 months payment holiday and possibly (depending on the lender) and extension of this. This only means that the mortgage will continue longer than originally contracted. However, mortgage providers will still be charging interest your credit rating won’t be impacted, lenders may make enquiries about your payment history and take these into account when making future lending decisions.
SERVICE CHARGES AND GROUND RENT
Under the new Act it clearly states that the new legislation does NOT affect the liability of long leaseholders to pay service charges, ground rent or other sums due under residential leases because the disease has not interfered with landlords’ contractual obligations to repair and maintain premises. Of course any worries and concerns should discuss these with your landlord (or managing agent).
As a residential managing agent or block manager, your main criteria is to do the job asked of you by the landlord and will cover all or some of the following:
- Financial objectives and set up of certain accounts
- Risk Management
- Leaseholder relationships
- Risk management, fire and health and safety compliance
- Organising periodic health and safety checks, fire risk assessments, asbestos and legionella checks and ensuring appropriate risk assessments are in place
- Arranging for specialist checks and tests by contractors and specialists
- Repairs and maintenance
- Bring in cakes for your team every Friday (well….maybe not but hey who doesn’t love cake?….that said right now as a managing agent you may well be working from home still…so more cake for yourself).
WHAT’S HAPPENING IN COVID 19 TIMES?
ARMA is in discussions with the Ministry of Housing, Communities and Local Government (MHCLG) about any current or future plans to introduce support for leaseholders so that service charges can still be paid to keep essential services going.
Managing agents and landlords will of course be seeing many of their leaseholders struggling to pay service charges. Leaseholders will be worrying about major works or non-repairs. Covid has hit everyone in every way possible.
If a landlord is thinking of getting a loan to ease pressure on the service charge account, they should research their lease carefully to see whether they may add the interest paid on such a loan to the service charge account. As property lawyers we can’t emphasis enough the merit of speaking to one of our team regarding this – your lease is such an important contract. Some leases permit borrowing and others simply don’t.
ARMA quotes “Credit control, management of cash flow and client communication in these challenging times will be vital, as well as working closely with your legal and accountancy teams to provide you with a full picture.”
FINAL THOUGHT ON PROPERTY LAW IN COVID TIMES
Times are seriously tough out there, and everyone is affected. Please do contact us if you have any worries, we really do want what’s best for everyone and if we can help ensure the law is smoothed out for you and if your lease needs to be clarified, just pick up the phone.
If you would like to chat with any of our team at LMP Law, here’s our contact link right HERE. We’d love to hear from you,
LAURA, PETER & MATTHEW