Tuesday, 3 November 2020

Advice for Commercial Landlords with defaulting tenants due to Covid 19.

Since the coronavirus pandemic took hold in the UK earlier in the year, the economic fallout from the ‘lockdown’ has been well-publicised.

One particular area where we have seen difficulties is with tenants of business premises running into financial issues and defaulting on rent payable to the landlord. Landlords and tenants have often adopted a pragmatic approach to the problem, for example by agreeing to defer payment of rent or a temporary reduction in what is payable. But not all difficulties are resolved in this way and landlords need to know the legal options available to them.

Below appears a summary of the options available to landlords. These options have always been available but since the onset of the pandemic, various pieces of legislation have been passed that significantly restrict landlords’ options.

Forfeiture of lease

Forfeiture is the landlord taking the unilateral step – permitted in the lease - of terminating the lease and taking the property back from the tenant. This can usually be done by peaceable re-entry (physically gaining entry to the property, securing it and excluding the tenant) or by obtaining an order from the court requiring the tenant to give up possession.

However, at present, forfeiture is not available as a result of the Coronavirus Act 2020. There is a ban on forfeiture for non-payment of rent until 31 December 2020 at the earliest, whether by peaceable re-entry or by court proceedings.

Commercial Rent Arrears Recovery (CRAR)

This is a procedure that allows the landlord to take possession of the tenant’s goods which can then be sold to discharge rent arrears.

Since the onset of the coronavirus pandemic, restrictions have been placed on this remedy. At present, there must be not less than 276 days’ worth of rent outstanding before CRAR can take place. Rent is typically payable quarterly under most leases, and this represents about 3 quarters of unpaid rent. If CRAR is to take place on or after 25 December 2020, there must be at least 366 days’ worth of rent outstanding.

If the outstanding rent is less than these amounts, the procedure is not available to the landlord.

Statutory demand and insolvency proceedings

Non-payment of debts (including rent) when they fall due will, in the eyes of the law, amount to insolvency. A step often taken by landlords was to serve a ‘statutory demand’ on the tenant, which is a formal demand for arrears to be paid within 21 days, failing which the landlord had the option of presenting a winding up petition to the court which, unless the arrears are paid, would see the tenant going into liquidation. Rather than face liquidation, tenants would often pay the debt.

Again, there have been changes to the law. The Corporate Insolvency and Governance Act 2020 now prohibits a landlord form presenting a winding up petition based on a statutory demand served on a tenant between the dates of 1 March 2020 and 31 December 2020.

Furthermore, no winding up petition can be presented in any event on the ground of non-payment of rent before 1 January 2021 unless the landlord has reasonable grounds for believing that coronavirus has not had an effect on the tenant’s business, or the issue of the unpaid rent would have arisen despite coronavirus having an effect on the business.

The rules set out above apply only to companies. There are no restrictions on serving statutory demands and presenting bankruptcy petitions in respect of individuals unable to pay their debts.

Drawing down on a rent deposit

If a rent deposit has been taken, there is no restriction on the landlord being able to draw down on that deposit (provided that the landlord complies with the terms on which the deposit is held). This area has been unaffected by the coronavirus pandemic.

Court proceedings

Non-payment of rent is a breach of the lease, and it has always been possible for landlords to begin proceedings in the county court, eventually leading to a county court judgment (CCJ) for the amount of the arrears. Once there is a CCJ, the landlord will have various enforcement options available to them.

This procedure has been unaffected by the coronavirus pandemic and the option remains available to landlords. However, it would be reasonable to assume that there may be delays in the court processing claims as we understand there is a backlog of cases form earlier in the year.

It is also worth pointing out that the landlord may not only have this remedy against the tenant, but also against guarantors of the tenant’s obligations. There are, however, and always have been limitations on what can be recovered from guarantors. A notice must be served on the guarantor before any court proceedings are started and only rent accruing due in the 6 months prior to the notice can be recovered.