COVID-19: Could section 82 of the Coronavirus Act 2020 cause commercial landlords to breach their banking covenants with lenders?

It is now well-versed in the COVID-19 property landscape that section 82 of the Coronavirus Act 2020 provides protection to business tenants by preventing landlords from exercising their rights of re-entry or forfeiture for non-payment of rent during the relevant period. The relevant period being the period from and including 26 March 2020 up to and including 30 June 2020.

However, more uncertain is the impact section 82 may have on landlords who, as a result of section 82, take a relaxed approach to the collection of rents due under a lease. Such a relaxed approach may manifest itself as landlords deciding to offer or allow informal rent holidays; extending any rent free periods; or simply delaying when they invoice their tenants for rents or when they chase up payment of such invoices.

Aside from the obvious cash flow problem such an approach may cause a landlord - which in itself could be a breach of a loan agreement if cash flow-based banking covenants are included within the loan agreement - there is a separate issue to consider. Could section 82 indirectly cause a landlord to breach the banking covenants they have given to a lender in a loan agreement relating to any property they own that is subject to a lease now able to benefit from section 82?

Quite simply, yes.

What banking covenants are being breached?

A common banking covenant given by a borrower in a loan agreement is that the borrower undertakes to diligently collect the rent due from its tenant(s). If a landlord therefore decides not to collect the rent due from its tenant(s) in light of section 82, it will be directly breaching a banking covenant. 

There may also be a breach of other covenants that are outside the scope of this article; for example, material adverse change or any investment-specific financial covenants.

What are the potential consequences of a breach?

In the worst case scenario, depending on the particular wording of the relevant loan agreement, a breach of banking covenants may be treated as an event of default by the lender, allowing the lender to take further enforcement action to realise their security. The specific wording of the relevant loan agreement would of course need to be checked before any specific advice or information could be given about what potential steps the lender may take against a borrower landlord who has breached their loan agreement.

What should landlords consider doing to mitigate the effects of section 82 on properties charged to lenders?

It is vitally important that landlords enter into a dialogue with their lender sooner rather than later and inform them about any banking covenants they believe they are breaching or likely to breach as a result of legislative changes and the circumstances surrounding COVID-19.

While there is never a guarantee that no further action will be taken by a lender in these circumstances, early communication is key and likely to result in temporary solutions being reached that not only protect the security itself but preserve the relationship between the parties. Such a resolution could be the parties agreeing to an extension of the performance of certain banking covenants, for example.

If you are affected by the above and would like someone to check your security documentation, please contact Krystyn Hall (commercial property) or Richard Capper (banking and finance) or another member of the team.

For further updates and other articles discussing the impact of the coronavirus please view our coronavirus hub.