Rent recovery and protection
Posted on 27 October 2020 by Sasha Loveridge
Commercial Property Rent Arrears – what landlords can do during Covid?
Covid-19 has had a significant impact on many businesses which has resulted in the Government introducing a variety of protections for business tenants.
So what can/can’t a landlord do if their tenant is in arrears/breach of covenant?
On 19 June 2020, the Government published a code of practice for landlords and tenants of commercial property across the UK. The code is voluntary but has been endorsed by a number of organisations including the RICS. The main principle of the code is “transparency and collaboration” and the Government’s aim is to encourage landlords and tenants to act “reasonably and responsibly”.
Forfeiture of commercial leases
Most leases contains a provision that allows the landlord to forfeit (end) the lease if the tenant is in breach of the lease, including non-payment of rent. Ordinarily, a landlord could forfeit the lease by either effecting peaceable re-entry (subject to procedural requirements) or by issuing forfeiture proceedings.
However, Section 82 of the Coronavirus Act 2020 prevents any forfeiture between 26 March and 31 December 2020 whether by proceedings or peaceable re-entry of the vast majority of commercial leases for non-payment of any sums due under the lease. It should be noted that those sums remain due and only an express waiver will prevent the right to forfeit when the restrictive period ends.
From 1 January 2021 (unless the Government extends the relevant period) landlords will be able to forfeit the lease and recover the property in the usual way.
This suspension only applies to forfeiture on the basis of non-payment of rent. Therefore, if a landlord has a right to forfeiture on any other grounds, it could still exercise it providing the necessary s.146 notice has been served under the Law of Property Act 1925.
Proceedings for forfeiture can still be issued but will be subject to the automatic stay.
Commercial Rent Arrears Recovery (CRAR)
CRAR allows a landlord (via an enforcement agent) to take control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears.
Prior to Covid, landlords were able to use CRAR if 7 days or more rent was due. The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 were introduced on 25 April 2020 and prevented landlords from using CRAR unless an amount of at least 90 days rent was due. However, the Government has since extended this. The level of rent arrears which must be outstanding before CRAR can be used is now as follows:
• For the period 29 September 2020 to 24 December 2020 – a minimum of 276 days rent must be overdue.
• For the period 25 December 2020 – minimum of 366 days rent must be overdue.
It is important to note that CRAR is only available in respect of rent itself, it cannot be used to recover any other sums due ie in relation to the service charge, insurance rent etc.
Statutory demands and winding-up
The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020 and provides that a landlord is still able to serve a statutory demand on a tenant but this is limited in effect as a landlord cannot present a winding-up petition against a commercial tenant based on a statutory demand that was served between 1 March 2020 and 31 December 2020, nor present a winding-up petition between 1 March 2020 and 31 December 2020 based on a commercial tenant’s inability to pay its debts (including rent).
There is an exception to this, in that a landlord may present a winding up petition based on a statutory demand served in the relevant period or based on a commercial tenant’s inability to pay its debts if there is reasonable grounds for believing COVID-19 has not had a financial effect on the tenant, or that the tenant’s debt issues would have arisen in any event.
There are currently no restrictions on a landlord issuing a claim under Part 7 or Part 8 of the Civil Procedure Rules in either the High Court or the County Court to recover arrears of rent from their tenants.
Furthermore, where the tenant is not entitled to exercise its right of set off/deduction (this will depend on the terms of the lease) in respect of rent payments, landlords may seek “Summary Judgment”. This means applying for a determination from the Court where the Defendant has no real prospect of defending the claim and there is no other compelling reason why the claim should proceed to trial. The existence of a prohibition for set off/deduction will often mean that there is no real prospect of a tenant successfully defending a claim, particularly a claim for principal rent.
Therefore, a rent arrears claim and application for Summary Judgment on that claim, or the threat of such can be a useful tool for a landlord, particularly in the absence of a right to forfeit as such applications are determined quickly (usually less than 6 months), are inexpensive compared to a full trial and the landlord is usually able to recover its costs from the losing party ie the tenant.
Even if the application for Summary Judgment is refused, it is relatively common for the Court to order instead that the tenant pay a sum of money into Court in effect to stand as security; any sums paid into Court are “secured” so the landlord’s position and ability to “get paid” is protected on any future insolvency of the tenant.
Despite the restrictions, it is not all doom and gloom for commercial landlords. Landlords still have a variety of options available to them:
• Rely on forfeiture for grounds which do not relate to non-payment of rent
• Draw down on a rent deposit
• Make a debt recovery claim against the tenant
• Pursue a guarantor of the lease
• Pursue a former tenant or guarantor which has now vacated the premises under the Landlord and Tenant (Covenants) Act 1995 (LTCA).
• Seek rent directly from a sub-tenant
If you are having difficulty in recovering commercial rent arrears, please contact Jack Manning on 01935 382680, he would be happy to help.