Options for Commercial Landlords in the New Normal
As a result of the enormous economic effects of Covid-19 and the restrictions on businesses which have been imposed, significant difficulties have been faced by commercial landlords regarding the recovery of outstanding rent and taking back possession of their property.
We are receiving enquiries from commercial landlords, anxious to know their rights and obligations in the ever changing environment. Below is a summary of the position and the main issues facing commercial landlords.
Does Covid-19 affect the lease?
Unless there are provisions within the lease specifically providing otherwise, the terms of the lease remain unaffected. In particular, the obligation to pay rent and other sums due under the lease continues.
The first port of call will of course be to review the lease. Whilst rare, it may be that the amount of rent payable in the lease is linked to the turnover generated by a tenant’s business operated at the premises, in which case a lower turnover would result in a lower rent being due. Alternatively it may be that the tenant can rely on a force majeure clause in the lease which may affect its obligation to pay rent. However, that is rare and if the lease does not provide for this, there is no implied common law term of force majeure.
A tenant may also seek to rely on the common law doctrine of frustration, on the basis that as a result of the pandemic and resultant restrictions, there is some form of illegality or failure of common purpose in the lease, or what is now required by the lease is so radically different from what was agreed, such that the lease has been frustrated and the parties should be discharged of their obligations. However, frustration is a high threshold to meet and the Courts will not lightly entertain such a claim.
Assuming the above scenarios do not apply, the rent will be payable as normal. Most modern commercial leases provide for the payment of rent without deduction or set-off and so the tenant is highly unlikely to be able to withhold rent for reasons related to Covid-19, unless with the express agreement of the landlord.
Can a landlord forfeit the lease for non-payment of rent?
No. Section 82 of the Coronavirus Act 2020 prevents landlords from forfeiting the lease and evicting the tenant for non-payment of rent, until 31 December 2020. This date is likely to be extended although landlords should keep abreast of developments on this front. Rent includes service charges and insurance rent, not simply the main rent payable under the lease.
Helpfully for landlords, sections 82(1) and (2) of the Coronavirus Act provide that where a tenant is in breach of the lease, a landlord cannot waive the right to forfeit simply by demanding or accepting rent but only by expressly waiving the right in writing. Therefore, landlords can be reassured that in demanding and accepting rent, they will not lose the right to forfeit the lease later down the line for a breach, unless and until this provision of the Coronavirus Act is changed.
Can a landlord issue a statutory demand for unpaid rent?
In theory, yes. However the effectiveness and practicality of this course of action may be questionable. The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020 and restricts the presentation of winding up petitions where a debtor cannot pay a debt due to Covid-19. The present position is that a creditor cannot present a winding up petition against a company based on a statutory demand that was served between 01 March 2020 and 31 December 2020, nor present a winding up petition between 01 March 2020 and 31 December 2020 based on a company’s inability to pay its debts (including rent) unless the creditor can show that Covid-19 has not affected the company’s finances, or even if it has, that it would have failed to pay in any event. Clearly, there is a high measure of protection for corporate tenants.
Despite these restrictions, there remains a range of options open to landlords, as set out below.
Options for landlords
Commercial Rent Arrears Recovery (CRAR)
CRAR was introduced in 2014 and allows landlords to recover rent arrears by taking control of a tenant’s goods and selling them. However, the tenant must be given advance notice of the landlord’s intention and CRAR must be exercised through certificated enforcement officers. However, recent regulations implemented as a response to the Covid-19 crisis require that in order for CRAR to be exercised, there must be at least 276 days’ outstanding rent unpaid, due to be increased to 366 days’ rent from 25 December 2020. This option may therefore not be available for most landlords. Further, given such action will very likely negatively affect the tenant’s ability to operate going forward, it is questionable how useful this will be for the landlord in the long run, where it wishes to retain the tenant long term.
Many commercial tenants are required to pay a rent deposit under a lease. Where a deposit has been paid, the landlord may be entitled to draw against the deposit where there are rent arrears. The circumstances in which the landlord may do so and the procedure to be followed, will often be set out in a rent deposit deed and landlords should check the requirements before drawing down against deposits. They should also consider whether the deed contains any stipulations where a tenant becomes insolvent as this could limit a landlord’s right to use the deposit. It may be in the landlord’s interest to draw down on a deposit early to avoid the risk of being unable to do so where a tenant becomes insolvent. Most deposit deeds require the tenant to ‘top up’ the deposit to an agreed amount after the landlord has drawn against it, although in circumstances where the tenant cannot pay its rent in the first place, that may not be possible.
Recovery from former tenants and guarantors
Landlords may be able to recover sums due from former tenants and guarantors, so long as they comply with the time limits set by the Landlord and Tenant (Covenants) Act 1995 (LTCA). If the lease is an old lease – granted prior to 01 January 1996, a landlord can recover from any former tenant or guarantor who has guaranteed the obligations of a subsequent tenant. If the lease was granted on or after 01 January 1996, a landlord may recover from a former tenant provided the former tenant gave an authorised guarantee agreement (AGA) to guarantee a subsequent tenant’s performance of its obligations. Likewise, a landlord can pursue a guarantor who has given a similar guarantee (GAGA).
Should a landlord wish to pursue a tenant or guarantor under an old or new lease, section 17 LTCA provides that it must first serve a formal notice on whomever it wishes to pursue, within six months of a ‘fixed charge’ falling due. Failure to comply with this strict time frame will result in the landlord losing its right to pursue those who have guaranteed the current tenant’s liabilities.
Recovery from guarantors
Most commercial leases will contain a guarantee of the tenant’s compliance with its obligations, from a related third party. Where a tenant fails to pay sums due to the landlord, the landlord may be able to pursue the guarantor. The landlord should check the terms and wording of the guarantee to ensure the steps it takes comply with what is required to trigger and enforce the guarantee.
Recovery from sub-tenants
Where a tenant is in arrears and has sub-let the premises, a landlord may invoke the CRAR procedure against the sub-tenant. In doing so, the landlord must first serve a notice on the sub-tenant requiring it to pay its rent directly to the superior landlord, rather than the sub-tenant’s immediate landlord. If the sub-tenant fails to do so, the (superior) landlord may exercise CRAR and other remedies against it, to the extent permitted by the Coronavirus Act 2020. This allows the landlord to enforce against a sub-tenant’s goods, provided that there are at least 276 days’ rent arrears outstanding from the immediate tenant. This course of action can prove beneficial to a landlord where its immediate tenant is in financial difficulty but any sub-tenant is not.
Court proceedings to recover the debt
There are no restrictions currently on a landlord’s right to issue proceedings against a tenant in the County Court or High Court for rent or other arrears. Sometimes the threat of proceedings or a judgment being obtained against it may be sufficient to obtain payment by the tenant. If, as is common, the lease provides that a tenant must pay rent without deduction or set off, the landlord may be entitled to obtain summary judgment against the tenant without the time and expense of a full trial. Generally speaking, the landlord will also be entitled to recover its legal costs if it is successful. The judgment can then be enforced in a number of ways, including charging any assets such as shares or property held by the tenant.
Despite the statutory restrictions which have been introduced, there remain a number of options available to commercial landlords seeking to recover rent arrears. The most appropriate option will depend upon the circumstances of the case including the respective positions of landlord and tenant. Landlords would of course be advised to seek to agree a way forward with their tenants in order to preserve the relationship going forward, if that is possible. That may include suspending rental payments for a certain time or agreeing lower rental payments with the balance due at a later date, so that the tenant may be able to trade itself into a better financial position, which will of course benefit the landlord long term. Landlords will also need to consider whether they wish to take back possession of their property once legislation permits, or if they want to retain their current tenant. They should bear in mind the difficulties they will likely face in finding a new tenant in the current financial climate.
Tenants should be aware that despite their restrictions, the obligation to pay rent will continue unless the lease expressly provides otherwise or a rent cessation is agreed with the landlord. They should therefore not place over-reliance on their statutory protections but be pro-active and to continue open dialogue with their landlords.
Tenants should also consider the terms of their lease and whether they are assisted by any force majeure clauses, or if they can take advantage of a break clause, should they wish to terminate the lease.
It remains to be seen what further measures will be introduced but we expect the present arrangement to continue well into 2021.
This guide is for general information only and should not be relied upon for specific advice. If you are a landlord and would like to discuss your options in detail, please contact Joe Reeves on 0207 481 6383 or firstname.lastname@example.org.
For our Bromley office please call 020 8464 4242 and for our Surrey office, please call Craig Batko on 01372 750100.
04 November 2020