In the UK, the majority of commercial leases require tenants to make rent payments each quarter, with the last quarter date falling on 25 March 2020.
If a tenant doesn’t pay within the period specified in the lease (often 14 or 21 days), then a landlord would in normal circumstance be able to terminate the lease, by re-entering the property and changing the locks or issuing court proceedings for forfeiture.
Following the outbreak of COVID-19, the normal rules no longer apply. On 23 March 2020, the government announced measures to assist commercial tenants by issuing a forfeiture moratorium for commercial leases within the UK. This means that:
- Landlords are unable to exercise a right of re-entry or forfeiture for non-payment of rent until 30 June 2020 (referred to as the ‘relevant period’)
- If your lease is a ‘business lease’ and has protection under the Landlord and Tenant Act 1954 (and it will do unless it says otherwise in the lease), then the landlord will not be able to apply to court to evict you for ‘persistent delay in paying rent’ in respect of any delay of payment during the relevant period
- Where court proceedings have already begun the courts will not be able to order business tenants to give up possession of the property for non-payment of rent before the end of the relevant period.
There is also a possibility of the relevant period being extended.
‘Rent’ for these purposes has a very broad meaning. It means anything payable by the tenant to the landlord under the lease. It does not therefore just mean rent as it is normally understood, but it also includes services charges, insurance payments, and VAT.
The moratorium does not however apply to other means by which a landlord can seek to enforce rent payments, such as:
- The Commercial Rent Arrears Recovery procedure (CRAR) whereby a bailiff can enter the property and seize goods to the value of the rent arrears upon giving seven days’ notice
- Serving a statutory demand seeking payment within 21 days failing which a petition for winding the company up may be made to the court; or
- Issuing proceedings for a money judgement.
The Risk of a Landlord Using CRAR
CRAR is not often used by landlords because:
- Recovery is limited only to the outstanding rent as that term is usually understood, and not to other outstanding payments under the lease
- Most tenants will not have sufficient goods at the property to make CRAR worthwhile
- Aggressively seizing goods might cripple a tenant’s long-term ability to trade and to pay rent and cause an unwillingness to cooperate and negotiate; and
- If the property does contain any valuable goods then they might be removed during the seven-day notice period, and while the landlord can apply to court to reduce the notice period, if it there is evidence, goods will be removed although this happens very rarely. It is also highly unlikely such an application will be given priority by the courts during the current pandemic.
One of the main problems with the CRAR process for landlords is that when used it waives the right to terminate the lease by re-entry or forfeiture for non-payment of the outstanding rent. The landlord must then wait until the next rent payment becomes due to terminate the lease. If all outstanding rent is not recovered through CRAR, the landlord’s primary enforcement tool is then unavailable to it.
The new emergency provisions in the Coronavirus Act 2020 include that nothing the landlord does during the relevant period can waive the right to forfeit. If a landlord thought that there was no chance that a tenant will eventually pay the rent, they can now use CRAR to recover what they can of the actual rent, then wait until the end of the relevant period and immediately forfeit the lease for non-payment of the balance.
It may therefore be that, contrary to what the government intended, in some circumstances landlords will now be more willing to use the CRAR process during the relevant period if there are valuable goods at the property.
The Risk of a Landlord Serving a Statutory Demand
A statutory demand is a formal demand for payment served by the landlord on the tenant. If the tenant fails to pay the debt, agree payment terms or challenge the statutory demand within a period of 21 days for a company or 18 days for an individual, then the landlord can file an application (known as a petition) to:
- Bankrupt an individual who owes £5,000 or more
- Wind-up a company owing £750 or more.
In light of the likely financial difficulties many defaulting tenants are inevitably facing during the current lockdown, there is no guarantee that the money owed will be recovered even if a landlord’s petition can be heard in court within a reasonable period of time. If a tenant has many creditors and little assets, only a few pence in the pound would be recovered.
There are also mounting delays within the court system following the coronavirus pandemic. Some courts have temporarily ceased dealing with bankruptcy and winding-up petitions with existing hearings being adjourned for at least three months. Getting an outcome, let alone a positive one for a landlord, is likely to be a long process.
What To Do If You Are Struggling
In light of the above, it makes even more sense for a landlord to negotiate a suitable arrangement with a struggling tenant than to embark upon potentially lengthy and costly enforcement processes. The best option for a tenant that is struggling to pay the rent is therefore to open up a dialogue with the landlord to see if an arrangement can be made.
It may be that you wish to terminate a lease in order to reduce your overheads. Many landlords are now much less amenable to letting tenants go. If you do intend to exercise a break option in your lease, make sure you do it correctly, because your landlord will be checking every detail to see if your break notice is valid and that you are in compliance with the terms of the break provisions in your lease.
It may be that you have to consider more formal insolvency and re-structuring procedures such as entering into a company voluntary arrangement or administration. If so you must seek advice sooner rather than later. The government intends to push through changes to insolvency laws to add new restructuring tools, including:
- A moratorium for companies giving them breathing space for from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure
- Protection of their supplies to enable them to continue trading during the moratorium; and
- A new restructuring plan, binding creditors to that plan.
There is also to be a moratorium on directors’ liability for wrongful trading, which we cover in a separate blog.
Landlords and tenants are facing a difficult times at the moment but if you are a landlord or tenant and want to discuss your options in more detail please call 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.