The COVID-19 pandemic presents landlords with unprecedented challenges both in considering the impact on the cash-flow of their tenants and, naturally, how this will impact the financial stability of their own businesses.
On 23 April 2020 the government published a press release further limiting the options available to commercial landlords wishing to recover rent arrears from commercial tenants.
Whilst landlords will appreciate the need to save businesses experiencing dire cash-flow difficulties, the legislation fails to discriminate between tenants who can and cannot afford to pay, and questions may be raised about whether the right balance has been achieved when considering the steps taken by the government. So what are the options available to a commercial landlord hoping to recover rent which is in arrears?
Press Release – 23 April 2020
The press release issued is entitled “New Measures to Protect the UK High Street from Aggressive Rent Collection and Disclosure”, and details further government plans to extend the temporary restrictions on commercial landlords taking enforcement measures against commercial tenants
The further restrictions include temporarily voiding statutory demands and winding up petitions issued to commercial tenants who cannot pay its bills due to coronavirus, and limiting landlords’ use of Commercial Rent Arrears Recovery which will only be available in cases where the tenant owes more than 90 days of unpaid rent.
The legislation is yet to be introduced and the devil will be in the detail, but this will inevitably further limit the options available to landlords wishing to recover rent arrears.
This press release builds on emergency legislation passed in March, which primarily imposed a 90-day stay on the vast majority of possession proceedings. Most importantly for commercial landlords, this includes possession claims made by landlords against tenants in reliance on any forfeiture provisions included within their leases.
This legislation, which came into force on 27 March 2020, significantly limits the options available to a landlord wishing to take enforcement action against tenants with a view to ending a tenancy. The measures provided under this legislation are due to last for 90 days from 27 March 2020, with the option for the government to extend the legislation if it is deemed necessary. The new measures proposed by the government are expected to follow the same timescale.
Options Available to Landlords
Despite this, in some circumstances there are steps that landlords can take to remedy and/or enforce the non-payment of rent:
- Breaches of non-payment terms
Whilst Section 82 of the Coronavirus Act 2020 confirms that the stay introduced by the government applies to re-entry or forfeiture for non-payment of rent, the legislation does not prevent re-entry for breaches of other covenants of a business tenancy. Forfeiture may therefore remain an option in some situations.
Any period of notice given to remedy a breach which can be remedied provided in the lease may be longer than usual due to lockdown.
In practice, forfeiture can only be effected by peaceable re-entry as any possession proceedings commenced in the Courts are suspended until 30 June 2020.
- Debt Claim
The current and proposed emergency legislation does not prevent landlords from issuing debt claims for rent arrears against tenants.
Landlords will need to give consideration to the commercial and reputational risks of doing so but this option does therefore remain available.
- Commercial Rent Arrears Recovery
Commercial landlords are currently able to use other means of enforcement such as Commercial Rent Arrears Recovery (CRAR) to recover unpaid rent. CRAR is a statutory procedure which allows commercial landlords to recover rent arrears by taking control of the tenant's goods and selling them, a process usually carried out through the appointment of enforcement agents.
Any CRAR action taken by a landlord will not amount to a waiver of the right to forfeit the lease in future once the emergency legislation is lifted.
However, due to the mass closure of business premises due to the lockdown measures introduced as a response to the Covid-19 outbreak, in practical terms it may be difficult to carry out this process.
Further, CRAR enforcement will be limited to cases where the tenant owes more than 90 days of rent by the proposed additional legislation.
- Enforcing Security
A commercial landlord may be able to utilise any rent deposit collected at the commencement of the tenancy to set-off against rent arrears.
Whilst this may be beneficial to the landlord in the short term, this will of course not provide any long-term protection for the landlord particularly when the tenancy comes to an end. Further, a landlord should consider the terms of any rent deposit deed before taking this action.
Landlords could also consider drawing on any guarantee which has been provided as security for the tenancy and demanding that any rent arrears are paid by the guarantor who has covenanted to be responsible for the rent.
The commencement of insolvency action against tenants remains an option to landlords in some circumstances.
However, Courts are adjourning most winding-up petitions except where there is a reason for expedition, usually because the petition is in the public interest.
It is also now clear from the government’s proposal issued on 23 April 2020 that commencing insolvency action against commercial tenants will shortly be restricted.
It is proposed that the Court will review any winding-up petition that claims the company is unable to pay its debts, to determine why. If the reason is related to COVID-19, the petition will not be permitted. We await the detail of this legislation and the restrictions it will place on landlords with interest.
It is likely that open-minded conversations between landlords and tenants will be key to reaching a resolution which is fair and reasonable to both parties navigating through the COVID-19 crisis.
Helpfully, the legislation which came into force in March does encourage landlords to enter into constructive discussions with tenants. In ordinary circumstances, landlords must be careful not to waive their right to forfeit by communicating with their tenants, but the legislation introduced restricts waivers to those expressly made in writing by a landlord, giving more flexibility.
Ultimately a tenant will still be liable to pay any rent which falls due during this period, whether this is addressed now or after the legislative restrictions are lifted. Further, any interest provisions applied to unpaid rent provided by the tenancy (or in the absence of such provisions, by statute) remains enforceable. It may therefore be prudent to enter into constructive communication with the tenant now to agree, for example, a payment plan or temporary rent holiday or reduction, which may help both parties with cash flow during this crisis and allow both businesses to survive in future.
If so, it is crucial that the terms of any such agreement or variation to the tenancy are formally and correctly documented to provide much-needed clarity to both parties, and to easily refer back to the terms should a need arise in future.
If you require any further guidance, have any further questions or wish to discuss these matters generally, on an initial no charge basis, please contact a member of our Property Litigation team:
- Harjie Bindra, Partner - firstname.lastname@example.org or 01527 880077;
- Kirsten Bridgewater, Partner - email@example.com or 07973 104065;
- Jessica Moore, Solicitor – firstname.lastname@example.org or 07901 256561;
- Rachel Chambers, Trainee Solicitor – email@example.com
Harjie Bindra is part of the Firm's Restructuring and Insolvency Sector.