The Covid-19 pandemic has presented difficulties for many businesses, some of which were already struggling financially. High street sales had reportedly fallen at the highest rate since 2008 even before the Government’s lockdown announcement. Other businesses, such as restaurants, have also faced financial pressures having had their doors closed for over three months.
In a bid to try and help these businesses, and to safeguard against aggressive rent collection tactics, the Government has imposed significant restraints on a landlord’s ability to recover rent from commercial tenants. However, landlords continue to face their own liabilities and so the purpose of this article is to consider what options a landlord currently has available to recover outstanding rent from a commercial tenant.
The avenues of recovery will largely depend on the specific circumstances that the landlord finds itself in and the wording of the relevant lease and other documents. However, there are some industry standard positions and available options that can be discussed.
What are the current restrictions?
Statutory demands and winding up petitions:
The Government has sought to restrict a landlord’s ability to serve statutory demands, as a precursor to winding up a company, as this had become an appealing option to landlords who felt they had little option but to proceed with that drastic action.
Paragraph 1 of Schedule 10 of the Corporate Insolvency and Governance Act 2020, provides that landlords may not present a winding-up petition against a company on or after 27 April 2020 based on an unsatisfied statutory demand that was served between 1 March 2020 and 30 September 2020. Further to that, a landlord may not present a winding-up petition between 27 April 2020 and 30 September 2020 based on a company’s inability to pay its debts unless it can be shown that the Covid-19 pandemic has not worsened the company’s financial position or that the debt issues would have arisen anyway. In practice, it is expected most arrears will fall within this protection.
All possession proceedings have now been stayed until 23 August 2020, except claims against persons unknown, under the Civil Procedure (Amendment No.2) (Coronavirus) Rules 2020. If a commercial property has a residential element then formal action will not be progressed until the stay is lifted.
Forfeiture of commercial leases:
The Coronavirus Act 2020 has been in force since 25 March 2020. Section 82 of that Act originally prevented landlords from forfeiting leases by re-entry or proceedings until 30 June 2020. That date has now been extended to 30 September 2020 (or such later date as may be specified by any further extension).
Commercial Rent Arrears Recovery (CRAR):
From 24 June 2020, landlords are prevented from using CRAR to attempt to recover goods from a tenant’s premises to apply to the debt, unless an amount of at least 189 days’ rent is due, under the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (No.2) (Coronavirus) Regulations 2020. Like many of the other restrictions described above, this is also currently in force until 30 September 2020.
What options are available to a landlord to recover outstanding rent?
Enforce against a guarantor:
As a landlord, you may be able to recover outstanding rent arrears from any guarantor who is a party to the lease. The options that a landlord has, and the circumstances in which it will be able to pursue a guarantor, will be provided for in the terms of the lease and usually mirror those obligations of a tenant. This can, therefore, be a very useful option, albeit some of the restrictions also apply, such as the inability to serve a statutory demand (as above).
Landlords are able to issue claims for the recovery of rent arrears from tenants (or guarantors) and, so far, there have been no restrictions imposed in that regard.
Landlords should write to the tenant with a letter before action setting out its claim to comply with the Pre-Action Conduct Practice Direction (or any other relevant pre-action protocol). This gives the tenant a final opportunity to pay the outstanding rent and allows it to raise any arguments on which it seeks to rely on for the non-payment of rent.
Further to that, a letter before action may help narrow any issues and will help to ensure that the landlord is complying with the Code of Practice for commercial property relationships during the Covid-19 pandemic which was published by the Government on 19 June 2020. Although the code is voluntary, the purpose is to ensure that tenants and landlords act reasonably and responsibly and that there are transparency and collaboration between them.
Landlords should consider whether the terms of the lease expressly restrict the tenant’s right to deduction, set-off or counterclaim. If so, it might be possible for a landlord to apply for summary judgment on the basis that the defendant has no real prospect of defending the claim and there is no other compelling reason why the claim should proceed to trial. Such an application, if successful, will greatly reduce the landlord’s costs and are usually dealt with a lot quicker than if a full trial were necessary.
It is also worth noting that most commercial leases provide that the tenant will be liable for the landlord’s costs associated with claiming or recovering any arrears of rent. However, those provisions do not prevent the court from exercising its jurisdiction to determine costs liability in any civil proceedings.
It is common for commercial leases to require a tenant to pay a rent deposit when entering into the lease. The landlord is permitted to draw on rent deposits in certain circumstances (which may include the non-payment of rent) and attention should be given to the terms of the lease and any rent deposit deed.
Statutory demands and winding up petitions:
Whilst no winding-up petition can be presented for failure to make payment of sums that are demanded by way of a statutory demand before 30 September 2020, they can form the basis of a winding up petition after 30 September 2020 (subject to any further extension).
Landlords can also continue to present winding-up petitions where it can be shown that the Covid-19 pandemic has not had a financial effect on the tenant or that the tenant would have been unable to pay its debts regardless of the financial effect of the Covid-19 pandemic. However, this is likely to be a difficult test to satisfy and which to evidence.
Although the Coronavirus Act 2020 has suspended the landlord’s ability to exercise a right to forfeit a lease on the basis of a tenant’s non-payment of rent (currently until 30 September 2020), a landlord will not be regarded as waiving its right to forfeit for non-payment of rent unless it expressly confirms as such in writing. What this means is that a landlord will be entitled to forfeit the lease on the basis of the tenant’s non-payment of rent during the suspension period if it remains unpaid once the suspension period has expired.
Despite the restrictions, there are still some options available to landlords. Tenants need to remain live to the fact that the arrears are not written off and are still contractually payable and ultimately, in the absence of an agreement for a deferment or reduction, they will be liable to the landlord and action will likely be taken in due course, as appropriate.
It is possible that the current time periods will be extended further and this will put landlords in an even more perilous financial position as they are currently being asked to act as financiers of the tenant businesses, even when this is not financially possible for them.
In the absence of permanent rule changes, there will be a number of outstanding issues to progress between landlords and tenants and some relationships will have been strengthened and others weakened by the stances taken during this unprecedented times. Where the balance of power will lie remains to be seen.
Our property litigation solicitors are highly trained within this area, if you require any assistance on your own case or have questions regarding the above article, please contact firstname.lastname@example.org or call 01202 786175.