Delays Continue On Road To Recovery For Commercial Landlords

 With the latest quarter day having recently passed, and further extensions preventing landlords from exercising the most powerful rent recovery options, we take stock of where the market is currently, and look at the options available to commercial landlords to recover rent arrears.

Market Conditions

Recent reports in the property press indicate that September saw a ‘surge’ in the payment of rent for commercial property across all sectors. It’s been reported that by the end of the last quarter, across all commercial property asset classes a total of 83% of rents had been collected. The worst hit sectors appear to be the leisure and retail sectors struggling to operate in any way resembling normal and other reports are not so optimistic, with the trade body representing the retail property industry warning that rent arrears could pass £2bn after this week’s quarter day

Many big retail tenants appear to be securing rent cuts using CVAs or simply refusing to make any payment and seeking rent reductions as leverage to remain in occupation without a clear restructure or cost-cutting scheme. Some of these tenants can well afford their rental obligations but appear to be taking advantage of the current legal position to renegotiate the terms of their leases. With that said, we have looked at what action is available to a landlord to recover rent, many of whom are themselves struggling to meet financial commitments to borrowers (with little relief from the Government) it would seem.

Remedies For Non-Payment Of Rent Affected By Statutory Extensions

What you can’t do

Forfeiture

Under s.82 of the Coronavirus Act 2020, there is no right to forfeit a business tenancy on the basis of non-payment of rent before 31 December 2020.

The stay on possession proceedings brought under CPR Part 55 expired on 20 September. From 20 September 2020, new Practice Direction 55C applied and will remain in force until 28 March 2021. It sets out the steps to reactivate stayed possession claims.

Winding up petitions

Where a tenant is unable to pay its rent due to COVID-19, a landlord is currently banned from presenting a winding-up petition before 31 December 2020 except where a creditor has reasonable grounds or believing COVID-19 has not had a financial effect on the company, or that the company’s debt issues would have arisen anyway.

Commercial Rent Arrears Recovery (CRAR)

A landlord currently may only exercise CRAR where a minimum period of arrears exists, as follows:

• From 29 September – 24 December 2020 – minimum rental arrears 276 days
• From25 December – minimum of 366 days

What you can do

Forfeiture on other grounds:

Whilst forfeiture for non-payment of rent is currently prohibited, landlords are able to forfeit for failure to comply with other lease covenants. Each case would need to be considered on its own facts as to the effectiveness of such action in light of a tenant’s ability to apply for relief and the commercial consequences to the landlord of the lease potentially coming to an end.

Rent deposit:

The landlord can consider drawing down on a rent deposit to secure funds. However, the landlord should consider the long-term solvency of a tenant and whether it wishes to preserve its right to forfeit in the future as a withdrawal from the rent deposit will waive a right to forfeit. Of course, a typical amount for a rent deposit tends to be 6 months’ rent so even if you are lucky enough to have one it may by now be exhausted and it may therefore be worth pursuing other options.

Action against Guarantor/former tenant:

Another option is to pursue the guarantor as a private individual either in a debt action or by way of a statutory demand. Where there is no dispute as to the amount of the debt, the landlord can serve a statutory demand and if the debt remains unpaid for 21 days, and it is £5000 or more in relation to a tenant who is an individual (more than £750 for commercial tenants) then this may be deemed evidence of inability to pay debt and therefore gives grounds to present a bankruptcy petition. The range of parties a landlord may pursue for rent arrears will depend on whether the lease is a “new” tenancy for the purposes of Landlord and Tenants (Covenants) Act 1995. If monies are being recovered pursuant to a s.17 notice, only the last six months’ worth of arrears can be claimed. Landlord’s need to be mindful of a guarantor or former tenant’s entitlement to ask for an overriding lease.

Debt action:

Landlords can issue court proceedings for the debt but need to be mindful of the restrictions in place on enforcement of any judgment as things currently stand. This option will not provide the landlord with a quick solution because the process can be expensive and protracted.

Payment agreement:

The Ministry of Housing Communities & Local Government have issued guidance by a Code of Practice for commercial property relationships during the COVID-19 pandemic which supports businesses coming together to negotiate affordable rental agreements. The Code is clear that tenants who are able to pay their rent in full should continue to do so, whilst those businesses that cannot pay in full should communicate with their landlord and pay what they can.

With the options for enforcement so restricted, many commercial landlords may find themselves under pressure to accept deals which give them some income rather than none at all but they should not be afraid to ask for financial evidence to justify a tenant’s need for concessions. They should also bear in mind from a negotiating standpoint that, whilst the current measures curtail their enforcement options, the tenant’s liability remains and for those that can afford to sit out the current restrictions the full range of options will at some point return.

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