With the outbreak of COVID-19 causing mass disruption to businesses across all industries commercial tenants could soon find themselves experiencing cash flow problems.
The March quarter day (25th) is looming and many commercial tenants will be concerned to have to find 3 months’ rent to pay to their Landlord.
In most instances it would be hoped that an amicable agreement could be made between landlord and tenant to ensure business continuity, such as a rent holiday or making smaller more frequent payments. However, what are the implications of not paying?
In this article Mark Hodgson, Partner in the Real Estate team at Wilkes identifies some of the possible ramifications that could arise as a result of non-payment of rent of which commercial tenants should take note.
There are a number of remedies available to commercial Landlord when a Tenant does not pay the rent on its due date, these include the following:
Forfeiture is the Landlord’s right to terminate the lease where a tenant either fails to pay rent or is in breach of covenant or condition of the lease. The landlord’s right and date for forfeiture is based upon the clauses specified within the Lease, but the right usually arises where rent is overdue for between 14 and 21 days.
There are two options with regards to forfeiture for non-payment of rent. A landlord can either:
- Change the locks, commonly using a certificated bailiff to do so; or
- Forfeit through court possession proceedings, which can be coupled with a claim for arrears.
However, if after the right to forfeit arises the landlord does something which treats the lease as continuing, the right to forfeit the lease on the basis of those particular arrears will be irrevocably lost. Even if the Landlord formally demands rent, they will waive the right to forfeit.
The tenant does have the option of applying to the Court for relief from forfeiture. In very basic terms if the tenant purges the breach and pays the arrears and any landlord’s reasonable costs the Court may exercise its discretion to reinstate the lease. Tenants have six months to make the application or lose the right to do so.
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 an effective tool, unless court proceedings are absolutely necessary they 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.
The Landlord could proceed straight to winding up (liquidation) of the tenant on the basis that they are insolvent, as evidenced by the fact that they cannot pay debts as they fall due. Normally, a statutory demand will be served, but not necessarily. A statutory demand is a formal demand for payment of the debt, which an insolvency court would rely on in order to make a winding up order if the debt is not paid.
This is an expensive route to go down for the Landlord, especially if the tenant is insolvent. However, if the tenant is not insolvent (and has other assets to protect), winding up is a serious threat.
Commercial Rent Arrears Recovery (“CRAR”)
This procedure allows 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 proceeds 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. It really depends on whether the landlord’s primary aim is to get the arrears paid, and continue with the tenancy, or to seek possession.
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.
To conclude, how the landlord proceeds is dependent on the solvency of the tenant and whether the landlord wants to prioritise retaining possession. In the current climate they may appreciate the risk of an empty property if a tenant is evicted.
Mark recommends that the first course of action is to start a dialogue with the landlord to achieve a sensible and reasonable compromise.