More protection has been announced for commercial tenants – so what can landlords do to get paid? Its a fair question, and one that needs exploring in context.
Last month, the Coronavirus Act 2020, aimed at providing protective measures for UK businesses to counteract the impact of the COVID-19 outbreak, came into force. Section 82 of the Act has temporarily suspended the forfeiture of commercial leases for non-payment of rent until 30th June 2020.
The team and I have been advising commercial landlords and tenants on managing their portfolios and liabilities and many have reached agreements which will give tenants breathing space but still see enough income being paid to landlords to service their own debt.
However, some tenants may either fail to engage with landlords or simply not have the funds to pay rent altogether. This has led to some landlords issuing statutory demands and winding up petitions against their tenants.
In response to pleas from the retail and hospitality sector for Government intervention, new measures to protect tenants have recently been announced.
What are these?
Landlords are now prevented from using ‘aggressive debt recovery tactics’
Plans have been outlined to include provisions in the Corporate Insolvency and Governance Bill 2020 to temporarily ban the use of statutory demands to recover rent arrears from commercial tenants from 1 March 2020 until 30 June 2020. It is not clear how the legislation will work in practice as the Bill is not yet drafted, let alone enacted although the Government has said that statutory demands issued in this period would be ‘voided’.
Further, winding up petitions (which may be issued by a creditor to liquidate a company when it is unable to pay its debts as and when they fall due) will be banned from being issued and winding up orders will not be made by Courts where the basis of the debt is non-payment of rent due to the Covid-19 pandemic. This will have effect from 27 April and is currently planned to be in place until 30 June 2020. This is no doubt a welcome intervention by many tenants who are struggling in the current pandemic.
It is not clear whether these measures will apply only to the retail and hospitality sectors although our view is that the measures are likely to be brought in across the board and apply to all commercial tenants irrespective of the sector in which they operate or whether they are financial facing difficulties specifically due to the Covid-19 pandemic. This will follow the theme of the Coronavirus Act which applied a blanket ban on forfeiture for non-payment of rent irrespective of the reason behind the non-payment in relation to all commercial leases.
What now for landlords?
The Government has stated that the temporary measures are “designed to acknowledge the pressures landlords are facing while encouraging cooperation in the spirt of fair commercial practice”. It also asked tenants to “pay rent where they can afford it” in recognition of the “strains felt by commercial landlords too”.
To be clear, none of the measures introduced by the Government mean that rent is not due to be paid. Rent remains due and will be due when the temporary measures have been lifted, either on 30 June or at a later date. A well advised tenant with plenty of liquidity should pay the rent that it owes or at least pay what it can afford to avoid storing up problems for the future.
Communities Secretary, Robert Jenrick said “We understand that landlords are facing their own very serious pressures and are concerned about their position with lenders. We are working with banks and investors to seek ways to address these issues and guide the whole sector through the pandemic”.
However, currently, no specific assistance has been offered to landlords by the Government. This leaves the question of how commercial landlords (many of whom have debt to service or rent to pay themselves) may recover unpaid rent.
There remain a number of enforcement options which may be available to landlords and have not been banned by the recently announced measures. If a tenant is not engaging or an agreement cannot be reached amicably, landlords may need to consider their debt recovery options, which are explained below.
Issue a court claim against the tenant
Landlords are still permitted to issue a debt claim against their tenants. Where rent simply has not been paid the tenant is likely to struggle to defend such a claim. Interest is usually payable under the terms of the lease and landlords can include interest in such a claim.
This form of debt recovery may not be attractive to many landlords who are looking to recover cash now, as a claim is not a fast process.
Landlords should therefore consider whether there are any other options available to them, including those set out below, before issuing court proceedings.
Has the tenant provided a rent deposit?
If a rent deposit has been provided a landlord is able to draw upon this alternative source of funds in the event of a failure by the tenant to pay rent. Usually, a landlord will have immediate access to these funds in circumstances where the tenant has defaulted on payment however the terms of the Rent Deposit Deed should be carefully checked.
After making withdrawals from the rent deposit, the landlord is usually able to require the tenant to top-up the deposit. However, if the tenant is unable to pay its rent it may be unlikely that it will be able to top up the deposit funds. This option, if available, would provide a landlord with an immediate cash recovery for the rent arrears.
Is there a guarantor?
Where a third party has guaranteed the performance of tenant covenants, a landlord should consider pursuing the guarantor directly for payment of any unpaid rent, costs, expenses or interest. This includes any current guarantors or former tenants who have provided a guarantee under an authorised guarantee agreement (AGA). Additional early pre-emptive steps will need to be taken before pursuing a guarantor under an AGA so early legal advice should be taken.
Of course, whether a payment will be recovered from a guarantor will depend on the financial position of the guarantor, who may also have been affected by the pandemic.
Commercial Rent Arrears Recovery (CRAR)
CRAR enables landlords to recover rent arrears by instructing enforcement agents to enter the property, seize the tenant’s goods and then sell them to recover an amount equal to the rent arrears. Landlords must remember that CRAR can only be used for pure rent arrears, VAT on rent and interest and not other payments such as insurance or service charge, even if they are reserved as rent in the lease.
CRAR is currently still an available option for landlords. However, this procedure can only be used against tenants whose premises remain open. Due to the current circumstances, many businesses have been forced to close and where they are still open, they are less likely to be experiencing issues with meeting rental payments. Therefore, the CRAR procedure may be of limited practical use during this time.
Further, as part of the recent measures announced landlords will only be able to use the CRAR procedure where rent has been outstanding for 90 days or more. As the legislation has not yet been enacted it is not clear when these measures will be introduced or from when they will have effect.
I can help you overcome the uncertainties you are faced with. If you are a commercial landlord or tenant, call me on 0113 849 4022 or email firstname.lastname@example.org.
For more information on the implications of the suspension of forfeiture of commercial leases under the Coronavirus Act 2020, please see our previous article here.