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Since the onset of Covid-19 in Ireland, in March 2020, we’ve seen a marked increase in the number of clients – both landlords and tenants – seeking advice and direction on their rights and obligations under leases.
While in certain cases the wording of a lease may favour a tenant and provide some defence to a claim by a landlord for rent, in general, any rent incurred during the pandemic is due and payable under the lease and remains due and payable throughout the pandemic. Landlords looked at many options including serving forfeiture notices and re-entering properties or issuing proceedings to collect the debt. In many cases, however, landlords accepted a reduced amount of rent and showed some forbearance.
A cross-industry issue
The extent of debt which is now due to landlords in Ireland as a group is significant and stretches across the entire commercial property sector. Hotels, bars and restaurants have suffered most of all and in many cases, tenants in these sectors paid a reduced rent or no rent at all. Many retail outlets have been unable to generate income to discharge rent and even the office market was affected.
The effect on industrial property was, perhaps, not as significant as the pandemic created a demand for industrial units. Industrial units were also sought to deal with Brexit-related distribution and storage issues. A recent article in the Irish Times indicates that one landlord, Hammerson, which owns shopping centres and other retail outlays only collected 31% of the rents due to them in 2020. Only 25% Hammerson’s operators in Ireland continue to trade and often, at a reduced capacity. This shows the bleak situation many landlords and tenants find themselves in.
How will landlords recover debts and how will tenants pay them?
There have been some interesting decisions during the pandemic, around this very topic including Justice Sanfey’s decision, in October 2020, in the case of Oysters Shuckers Limited trading as Klaw, a well-known Dublin seafood restaurant. Justice Sanfey refused to grant an interlocutory injunction to restrain the landlord from forfeiting the lease and re-entering the property. In relation to the non-payment of rent, Justice Sanfey concluded “there is no stateable basis upon which the court could hold that rent is not payable under the disputed lease in respect of periods in which the plaintiff has had to close the premises due to circumstances caused by the Covid-19 Pandemic”.
When advising both landlords and tenants over the last 11 months, it has become clear that landlords in many cases may agree a reduction in payment of rent while the business is affected in the pandemic but on the basis that ultimately any shortfall will be paid. It is only in cases where a landlord takes the view that they will not realistically get paid the shortfall that a landlord will agree to reduce rent and waive the right to claim the rent when normal trading conditions resume. Many tenants are agreeing to make reduced payments while accepting that any unpaid balance remains due as they have no option and it means there is a better chance of their business surviving after the pandemic.
However, it seems likely that for hotels, bars and restaurants, it will take some time before normality returns. Some restaurants have already adapted by setting up successful takeaway facilities, but they are the exception and not the norm.
As the pandemic, hopefully, ends towards the end of 2021, landlords will be looking at their options. These include:
serving a forfeiture notice and looking for possession of a property, whether by court order or by re-entering the property;
issuing proceedings for the collection of arrears of rent; or
where personal guarantees have been given, pursuing the guarantors.
Tenants also need to look at their options and, undoubtedly, the first option will be to try and see if a reasonable agreement can be negotiated with the landlord. In many cases, this will be the best option for both the tenant and landlord as it provides certainty and continuity. The landlord, however, has to agree to compromise and, in many cases, this will be difficult.
If a compromise cannot be reached, then tenants need to look at the insolvency options available under the 2014 Companies Act. The two principal options will be firstly, examinership and secondly, liquidation. While Schemes of Arrangement could also be considered, in most cases the landlord will be the principal creditor and a Scheme of Arrangement would therefore not be effective without the landlord’s agreement.
Both examinerships and liquidations will depend on the particular circumstances of the tenant, they are options on which a tenant should take legal and financial advice which may assist in reaching a solution.
About the author: Michael Lavelle, Managing Partner and insolvency and restructuring expert