In this article Mark Hodgson, Partner in the Real Estate team at Wilkes and Katie Briggs in the Property Litigation team, identify the issues for commercial landlords and tenants as a result of the Coronavirus Act 2020 and what action can still be taken by landlords if rent is not paid during lockdown of which commercial tenants should take note.
The March quarter day (25th) fell due for tenants shortly after the lockdown was announced and The Coronavirus Act 2020 was brought in by the Government. Section 82 of the new legislation is important for landlords and tenants at commercial properties.
There have been concerns on both sides regarding the rent due from tenants who are struggling to pay whilst the lockdown continues and retail units cannot open. This has then undoubtedly affected the income stream for landlords and any associated mortgage or loan payments due.
Section 82 under the Act itself introduced a moratorium on forfeiture of leases until 30th June 2020 as a result of a tenant being unable to pay the rent due during this period. Under normal circumstances a landlord would be entitled to re-enter the premises and change the locks or alternatively issue proceedings on the basis of forfeiture. Additionally, during this period any demand for rent or conduct by a landlord suggesting a lease exists will not amount to a waiver of the right to forfeit a lease. The date of 30th June 2020 is subject to review and may be extended by the government as necessary. During this period the rent remains due and once the moratorium has been lifted landlords will be entitled to forfeit leases for any unpaid rent.
Whilst it has been possible for some agreements to be reached between landlords and tenants, in terms of rent holidays, rent reductions (on a temporary basis) and allowance for payments to be made monthly, some tenants have failed to make any payment or even communicate with their landlord to agree any temporary measure until 30th June 2020.
Recently, on 23rd April 2020, the government announced a moratorium would be placed on insolvency proceedings with a ban on the temporary use by landlords in issuing statutory demands (presented during 1 March and 30 June 2020) or winding up petitions (presented from 27 April to 30 June 2020) against their tenants who have not paid the rent due. This moratorium is expected to last until 30th June 2020 but the legislation has not yet been passed to confirm the specifics of this moratorium. A general stay has been imposed on all winding up petitions by the Companies Court in any event.
The Government have further proposed restrictions on recovery of rent through the use of Commercial Rent Arrears Recovery (CRAR) save for rent which has been due and outstanding for 90 or more which can still be enforced using this method.
This procedure would usually allow landlords of a commercial premises to instruct an enforcement agent (for example a certificated bailiff), after giving 7 days’ notice, to take control of a tenant’s goods and sell them in order to recover the value of the rent arrears.
If a Landlord were to proceed down this route, it would waive their right to forfeit for the current arrears, although a new right would accrue if rent due on the next rent payment date is unpaid.
Landlords remain able to use other methods of enforcement with tenants who do not agree any concessions for rent during this period or are utilising this time to avoid making any payment at all.
These include the following:
Sue for arrears
The Landlord may issue a demand for payment, coupled with a threat that County Court Proceedings will be issued on expiry of the deadline set in the demand in default of payment.
Although this can be an effective tool, court proceedings considered to be money claims are being generally adjourned by courts at present so the process is unlikely to elicit the rent or money due from the tenant for a few months. Court proceedings of this nature are often rejected in favour of other methods of recovery because they can be expensive, and it can take months to receive a hearing date, if there are any grounds to dispute the demand. In this time, the lockdown and moratorium may have been lifted. It is worth bearing in that at that juncture the landlord could consider forfeiting the lease instead which would be a quicker and cheaper method to utilise.
Pursuing a guarantor
If a person or company has agreed to act as a guarantor for the tenant’s covenants under the lease, it is open to the landlord to consider pursuing them if the tenant is in arrears of rent.
Depending on the provisions in the lease and the guarantee given by the guarantor, the usual way to enforce the guarantor’s obligations would be to issue court proceedings. A landlord may also, in certain circumstances, be able to claim against a former tenant of the premises.
Depending on the terms of any rent deposit deed landlords may wish to consider utilising the deposit against rent arrears due from the tenant. The tenant will need to replace the deposit at a later date but would alleviate the pressure for both landlord and tenant during the interim.
To conclude, how the landlord proceeds is dependent on the solvency of the tenant and whether the landlord wants to prioritise retaining the tenant once the moratorium has been lifted. Any agreement regarding the rent during this period should be set out in a side letter to ensure it is clear this is temporary measure and not a variation of the lease terms generally.
Mark and Katie recommend that the first course of action is to start a dialogue with the landlord to achieve a sensible and reasonable compromise.
Any assistance required in achieving an agreement can be dealt with the team at Wilkes. Mark can be contacted on 0121 710 5848 and Katie on 0121 710 5839 or via email at email@example.com or firstname.lastname@example.org.