COMMENT It’s not just tenants that are suffering from the nationwide and local lockdowns being imposed by the government and the trading restrictions that are the result. The restrictions that have been placed on a landlord’s ability to take action to recover rent in an effort to support tenants are having the opposite effect on landlords.
One of the biggest areas of concern for our landlord clients right now is how they can go about recovering outstanding rent when their tenants are not paying and failing to engage. While many of our landlord clients accept that this is a difficult time for all, the unfortunate effect of the restrictions on legal action to recover rent arrears is that it is protecting those very same tenants that had a poor track record of making rent payments even before the pandemic hit.
It is fair to say that landlords of commercial tenants have previously had the benefit of some pretty draconian remedies in the event of tenant default. The remedy of forfeiture permits the landlord to peaceably take back possession of premises in the event of a breach of covenant without any notice to the tenant and can be a very powerful weapon to a landlord in securing payment. And before the introduction of commercial rent arrears recovery, landlords would often instruct a bailiff to attend a business premises without notice and seize goods in satisfaction of an outstanding debt such as rent arrears.
However, the global coronavirus pandemic has significantly changed the landscape and shifted the playing field strongly in favour of protecting tenants (whether or not those tenants are deliberately choosing to withhold rent) and restricted the remedies available to a landlord in the event of tenant default.
Moratorium
The pandemic has given us new legislation, most notably in the form of the Coronavirus Act 2020 (“the Act”). The Act provides a moratorium preventing landlords from exercising a right to forfeit or repossess their premises, whether that be by way of the issue of court proceedings for possession or peaceable re-entry for non-payment of rent.
Initially, the moratorium was in place for three months to 30 September 2020. It has since been extended until 31 December 2020, and it is quite possible that this will be extended even further depending upon the continuing effect of the pandemic and the implementation of additional national and local lockdowns.
Notably, however, the Act does not prevent a landlord from forfeiting for other breaches of covenant which are not related to non-payment of rent or other sums due under a lease.
The use of CRAR has also been restricted, and the amount of net unpaid rent that has to be outstanding before CRAR can be exercised has been increased to 276 days’ net rent. It will increase further still to 366 days’ rent on 25 December 2020. Merry Christmas!
Insolvency dead end
With the ban on forfeiture in place in respect of rent arrears, many of our clients were looking to take insolvency proceedings against their tenants in order to secure rent payments. However, that door was firmly closed with the passing of the Corporate Insolvency and Governance Act 2020, which came into force on 26 June and which prevents the issue of a winding-up petition against a corporate tenant between 27 April and 31 December 2020 based on a statutory demand served between 1 March and 31 December 2020.
Therefore, in essence, there is a moratorium against issuing insolvency proceedings against a corporate tenant unless the creditor has reasonable grounds for believing that the pandemic has not had a financial impact on the company or the debt would have arisen even if Covid-19 had not had an impact on the company, which is not going to be straightforward to prove.
Interestingly, there is no such restriction against taking bankruptcy proceedings against a non-corporate tenant, but I suspect that the bankruptcy court would approach a bankruptcy petition in much the same way as the companies court would and decline to make a bankruptcy order where coronavirus has impacted a sole trader.
Options remaining
The moratorium does not suspend the obligation to pay rent but rather restricts landlords’ ability to take certain action as a result of non-payment. Landlords still have the ability to:
- charge interest on any arrears at the rate specified in the lease
- commence debt recovery proceedings, although enforcing any judgment could be an issue given the restrictions outlined above
- call upon parent company or other guarantors
- draw down on rent deposits and then seek to force the tenant to top up.
In these unprecedented times, the government has clearly chosen to prioritise the interests of tenants over those of landlords, giving them the ability to try and trade their way out of the pandemic. Unfortunately, many landlords are not in the same position and seem to have been abandoned by the government.
With the possibility of a vaccine on the horizon, we will hopefully reach some sort of normality soon, but the message is clear: landlords and tenants are expected to try and resolve their disputes amicably and away from the court. However, if tenants do not engage then landlords are in an impossible situation with very few options.
In the event that court proceedings are necessary, the court will not be in a rush to list matters for hearing. However, one thing does seem certain: the court will be overwhelmed with landlord and tenant claims when normality returns, and the already overburdened court system pre-pandemic is likely to struggle to cope.
Steven Ross is a legal director with Harold Benjamin specialising in real estate litigation
