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Loophole leaves gyms open to legal action by landlords

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This situation was, until very recently, wholly unforeseen, and is unfortunately entirely outside of our control
– Glenn Earlam

The legislation intended to protect commercial tenants from eviction during the coronavirus (COVID-19) pandemic has a loophole, which could see hundreds of gyms and leisure centres being hit with disproportionate legal action by their landlords.

Section 82 of the Government’s Coronavirus Act 2020 came into force on 25 March to help protect commercial tenants, banning the forfeiture of commercial leases until 30 June 2020 (or longer if the government deems necessary) for non-payment of rent. The act seeks to protect businesses which face weeks, if not months, of operating with reduced income, after being told to shut their doors due to the pandemic.

The act, however, does not prevent landlords from pursuing a Commercial Rent Arrears Recovery (CRAR) process as an alternative to forfeiture. CRAR is a debt claim – service of a statutory demand – and enables the landlord to commence winding-up proceedings.

While some landlords have engaged constructively with tenants to find solutions that work for both parties, there is a growing number of cases where the reaction of landlords has been to instigate legal proceedings against operators immediately.

David Lloyd Leisure is among those to have received threats of legal action from their landlords.

The operator appealed to the landlord of one of its sites to waive rental payments due on 25 March 2020 – and going forward for the immediate future – until the crisis eases and the government allows its clubs to re-open.

The request was refused immediately by the landlord and was instead met with the threat of legal action through the issuing of a statutory notice.

“This situation was, until very recently, wholly unforeseen, and is unfortunately entirely outside of our control," said Glenn Earlam, CEO of David Lloyd Leisure.

“In these exceptional times, we want to work together with landlords to ensure we can survive this pandemic and emerge with businesses able to continue to pay rent and other costs in the future.”

There is no requirement to serve a statutory demand as a precursor to commencing winding-up proceedings, but many landlords do this as the non-payment of the statutory demand is itself evidence of an inability to pay debts.

PureGym has also had similar experiences across its facilities.

PureGym CEO Humphrey Cobbold said: “The burden of dealing with the economic impact of the COVID-19 pandemic continues to fall on commercial tenants rather than being shared equitably by landlords as well."

He added that the government should amend Section 82 immediately, in order to protect operators from crippling claims.

“The Government has the opportunity to complete the job it correctly started by doing more to protect commercial tenants impacted by COVID-19," he said.

“Time is of the absolute essence, given that proceedings such as statutory demands and winding up orders threaten to force companies into insolvency within days of being issued.

“It should act to close down the unreasonable and aggressive tactics being used by landlords as a matter of urgency."

Physical activity body ukactive is now urging the government to act swiftly, shut the loophole and stop landlords from coercing gyms and leisure centres into paying rent that has been withheld as a result of the lockdown.

It wants the government to:

• Amend the Coronavirus Act 2020 to stipulate that landlords cannot pursue legal action against tenants, such as issuing statutory demand notices and winding up orders.

• Reduce the pressure on landlords by introducing financial support for a rent holiday, preventing them from resorting to legal action.

Huw Edwards, CEO of ukactive, said: “While landlords are under enormous pressure themselves, taking legal action – such as issuing statutory demands and winding-up orders against gyms and leisure centres – is entirely disproportionate to the financial implications they themselves face.

“Many of our members are faced with the harsh reality of no revenues for a long period, so must take steps to preserve cash, including not paying their rent for the quarter ahead.

“We know from our discussions with operators that some landlords have engaged in constructive discussions to reduce the pressure on tenants, however, a worrying number have decided to pursue statutory demand notices or winding-up orders.

“We need the government to act now to direct within the Act that landlords cannot do this.

"With 2,800 gyms at risk of permanent closure, and 100,000 jobs at stake, time is of the essence."

“We urge the Government to take urgent steps to close the loophole and defend these businesses, safeguarding the jobs and valuable services provided by gyms and leisure operators."

Gyms and leisure centres aren't the only part of the wider leisure industry which are falling victim to the situation – forced on them by the government's decision to close business on 20 March. Pubs, restaurants, cafés, cinemas, and retailers are facing similar threats from landlords.

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The legislation intended to protect commercial tenants from eviction during the coronavirus (COVID- 19) pandemic has a loophole, which could see hundreds of gyms and leisure centres being hit with legal action by their landlords.
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