The prospect of lower demand
Although the impact of COVID-19 on the health sector has obviously been very different to that on the rest of the economy, it has taken its toll on the finances of the private healthcare sector too. Private hospitals, clinics, dentists, physiotherapists and chiropractors have all had to cancel operations and appointments due to the restrictions on movement and patient concerns over their potential exposure to COVID-19. In the case of the dentistry sector, the Chief Dental Officer has required that routine dental work be suspended throughout the UK. The future looks uncertain as we are likely to have to maintain social distancing measures for a significant period. Further the impact of the lockdown on jobs and personal finances is likely to reduce the number of insured and self paying patients seeking treatment in the longer term.
There is therefore a real threat to the financial viability of the private healthcare sector, even if it is attracting less attention than the threat to the financial viability of care homes devastated by the pandemic. While taking advantage of the government furloughing scheme will help protect jobs it will not help those businesses meet their obligations to lenders and landlords. The challenge ahead is how to make repayments to banks and continue to pay rent to landlords during a period of low demand.
What are the landlord’s options?
Landlords will all react differently depending on their own circumstances and attitudes. A large number of healthcare properties are owned by REITs. The agreement reached between the government and private hospitals to turn over 8,000 independent hospital beds across England (and more in Scotland) to the NHS will have provided much needed relief to hospital groups and these REITS and their other landlords, as rental payments will continue for as long as the deal lasts. However, what will happen when the government deal ends? Perhaps the backlog in NHS operations will provide an opportunity for the private hospital sector once it does.
Other landlords are likely to face pressure from their lenders shareholders and investors the longer the current situation lasts and rental income remains unstable. Smaller private landlords are likely to have to ride the storm and recover that they can when tenants are able to pay. The prospect of a tenant ceasing to trade and vacating a property leaving fit out works in situe and with no prospect of being able to pay dilapidations is not attractive to any landlord.
For other businesses which rely on self paying patients or business from private medical insurance, the position with regard to their obligations to pay rent the position is more worrying. Landlords also have costs to cover. So for businesses or individuals who could not pay the March quarter’s rent and have no respect of paying the June quarter’s rent either, what options are open to landlords?
- Forfeiture rights suspended
Normally a landlord can forfeit / terminate a lease for non-payment of rent. However, the government has introduced a moratorium on forfeiture of business leases for non-payment of rent which gives tenants a breathing space until at least 30 June 2020.
- Commercial Rent Arrears Recovery (CRAR).
This is an option for landlords as a method of enforcement to recover rent arrears relating to written tenancies of commercial properties, but where at least 7 clear days’ notice has to be given before goods are secured/seized and sold.
The government intends to enhance these protective measures for tenants by implementing temporary changes to the right to use the usual additional remedies available to landlords including insolvency processes and Commercial Rent Arrears Recovery (CRAR). We can expect legislation to be pushed through parliament this month. CRAR will be prohibited unless rent has been outstanding beyond 90 days.
- Statutory demand
A statutory demand is a preliminary (but not always mandatory) step towards pursuing winding-up proceedings against a tenant company. It is mandatory for landlords where the tenant is an individual. A statutory demand can only be served if the company owes an unsecured liability of more than £750 (or an individual more than £5000), the outstanding sums are not in dispute or capable of being disputed, and you are not aware of any set off or counter claim. Once served, the tenant company has 21 days to pay the liability claimed or otherwise agree terms with the creditor, after which the creditor is entitled to present a winding up petition and refer to the unsatisfied statutory demand as evidence of the debtor company’s insolvency which would entitle the Court to make a winding up order. If the tenant is an individual, they could make an application for the statutory demand to be set aside. This must be done within 18 days of service of the statutory demand. In the current climate any individual tenants issued with a statutory demand would be advised to consider an application to set aside the statutory demand within the 18 day period.
It remains to be seen whether large numbers of landlords decide to pursue these measures. It seems that most have reserved their position preferring instead to see what happens over the coming months as opposed to going straight to an enforcement situation and or seeking to take possession. Of course much depends on how sympathetic lenders and investors will be.
What should tenants do?
The landlord and tenant relationship risks becoming strained as landlords and tenants take different approaches. What is clear is that remaining silent and ignoring the issue will not help either party. Open and honest dialogue is to be encouraged at the earliest opportunity. Landlords and tenants should also bear in mind that they will have to maintain a relationship when we eventually come out of the other side of the COVID-19 pandemic. There is an additional problem: most healthcare properties are designed and fitted out for one category of operator – obtaining vacant possession and reletting is not really a viable option for landlords in this climate. Equally healthcare occupiers will not want to face having to relocate after the pandemic and losing what goodwill and customer base remains.
- Monthly rent payments
A common method of improving cashflow for businesses and individuals who can afford to pay a level of rent during this period is to move from quarterly rents to monthly rents. Most landlords and their lenders would agree to this as it ensures incomes continues. This can quite often be agreed by letter.
- Rent free periods
Some tenants may have seen income disappear completely and therefore simply cannot afford to pay the rent in March or June perhaps longer. Landlords may feel it is better to keep the tenant in situe with all the liabilities this entails and therefore having reviewed the tenants financial position may grant a rent free period for a few weeks or months. Of course such an arrangement might need to be reviewed.
- Deferred rent payments over longer period
Some landlords and tenants may agree a short term rent free period but on the basis that the unpaid rent is repaid at a later date – perhaps with the September 2020 and December 2020 rent payments. The issue here is that payment terms requiring instalments to be paid too soon are likely to put the tenant under too much pressure so staggering payments over a longer period – perhaps monthly instalments until June 2021 - is a better and more realistic solution.
Landlords and tenants alike can expect a tough June (which may be worse than March) which may require concession agreements reached in March to be revisited or fresh discussions to take place. It is difficult to plan too far ahead but landlords and tenants should take steps to reach amicable agreements and landlords should bear in mind the amount and work and cost involved in taking some of the measures outlined above. Tenants should however consider that the moratorium on forfeiture is temporary and does not extend to all measures open to landlords and none of the measures permit a simple refusal to pay the rent due under the lease. Australia introduced a Mandatory Code of Condition earlier this month compelling landlords and tenants to work together. It implements targeted rent relief for SME tenants and obliges landlords to offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100 per cent of the amount ordinarily payable, based on the reduction in the tenant’s business. Let’s hope that all healthcare businesses can get through this difficult period and their valuable role in the health of the UK is recognised and they are not allowed to disappear.