Commercial leases and the Coronavirus Act 2020
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The government announced on 19 June 2020 that it would extend restrictions on the ability of landlords to recover commercial rent arrears from tenants - this has since been extended again and is now due to expire on 31 March 2021.
It also published a code of practice for landlords and tenants of commercial property across the UK. The code is voluntary, but has been endorsed by a number of organisations including the RICS, and advocates "transparency and collaboration" between commercial landlords and tenants, who are encouraged to act "reasonably and responsibly".
Watch this short video by Fieldfisher partner and property litigation specialist Owen Talfan Davies for a summary of the position for commercial landlords as we approach 2021.
It also published a code of practice for landlords and tenants of commercial property across the UK. The code is voluntary, but has been endorsed by a number of organisations including the RICS, and advocates "transparency and collaboration" between commercial landlords and tenants, who are encouraged to act "reasonably and responsibly".
Watch this short video by Fieldfisher partner and property litigation specialist Owen Talfan Davies for a summary of the position for commercial landlords as we approach 2021.
Commercial landlords and tenants will find themselves in a variety of circumstances due to the effects of Covid-19, the nature of which will determine what options remain to landlords to recover rent from tenants, former tenants, subtenants and guarantors.
Current restrictions
The Coronavirus Act 2020 – forfeiture of commercial leases
The amended Section 82 Coronavirus Act 2020 currently prevents any forfeiture between 26 March 2020 and 31 March 2021, whether by proceedings or peaceable re-entry, of the vast majority of commercial leases for non-payment of “any sum” due under the lease.
Contrary to some misunderstandings, those sums remain due by tenants and only an express waiver will waive the right to forfeit when the restricted period ends.
The Ministry of Housing, Communities and Local Government (MHCLG) clarified a number of unanswered questions arising from the Coronavirus Act 2020, addressing the following key points:
Rent – for the purposes of the forfeiture moratorium, rent includes "any sum" a tenant is liable to pay under a business tenancy. As such, the forfeiture moratorium will apply to service charge and all other outgoings under a lease.
Business tenancy – section 82 of the act is intended to cover "all commercial leases with someone in occupation of the premises for the purposes of their business."
This means the forfeiture moratorium will cover all commercial leases, whatever their length of term and irrespective of whether they enjoy security of tenure protection under the Landlord and Tenant Act 1954, where someone is in occupation of the premises for the purposes of their business.
Consensual forfeiture – section 82 of the act appears to prohibit consensual forfeiture.
MHCLG has indicated that whether forfeiture by consent is caught by the moratorium will depend on the facts of a given case.
Landlord's other remedies – section 82 does not currently impact upon the other remedies which remain available to a landlord to recover unpaid rents (see below).
The MHCLG is monitoring enforcement of non-payment closely and keeping the issue under review.
Stay of possession proceedings
Practice Direction 51Z initially stayed all possession proceedings from 27 March until 25 June 2020 (except claims against persons unknown), and was ultimately extended until 30 September 2020.
Practice Direction 55C (as amended) provides for the resumption of possession proceedings, now the stay has expired. If a landlord issued a claim before 3 August 2020, the landlord must serve a 'reactivation notice' for the claim to be listed or relisted – and no later than 42 days before any scheduled hearing date (if one exists), otherwise the trial will be vacated.
There is no standard form for a reactivation notice but it must be in writing and contain certain prescribed information. If no reactivation notice has been served by 29 January 2021, the claim will be automatically stayed.
The practice direction also states that the usual provision that the initial hearing in a possession claim should be within eight weeks of issue of the claim will not apply between 20 September 2020 and 28 March 2021. This suggests that there are likely to be delays in proceedings while the courts deal with the backlog of claims.
Commercial Rent Arrears Recovery (CRAR)
The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 initially prevented landlords from using CRAR unless at least 90 days’ rent was due but has since been extended and will rise to 366 days' rent from 25 December. This restriction applies until 31 March 2021.
Statutory demands and winding-up
The Corporate Insolvency and Governance Act prohibits the presentation of a winding-up petition based on an unsatisfied statutory demand served between 1 March 2020 and 31 March 2021.
Under the act, it is not possible to present a winding up petition between 27 April 2020 and 31 March 2021, unless it can be shown that Covid-19 has not worsened the debtor's financial position or the debtor could not have paid its debts even if there had been no Covid-related worsening of its financial position.
Remedies that remain available to landlords
Recovery from former tenants and guarantors
A landlord may be able to recover rent arrears and other sums due under the lease from former tenants and their guarantors.
However, landlords must be aware of the controls and strict timescales on the use of this remedy imposed by the Landlord and Tenant (Covenants) Act 1995.
Recovery from existing guarantors
Where the existing tenant’s obligations are guaranteed by a third party guarantor, a landlord may be able to recover rent arrears or other sums due under the lease from the guarantor.
A landlord should check the wording of the guarantee carefully to see whether liability has been triggered, what steps must be taken and what options the landlord has under the guarantee.
When agreeing any rent concession letters, landlords should check the guarantee provisions do not serve to release guarantors where such concessions are given (most provisions are drafted to avoid this risk).
Recovery from subtenants
Where an immediate tenant has sub-let its premises and the immediate tenant is in arrears of rent under its lease, the CRAR procedure gives a superior landlord a right to serve a notice under section 81 of the Tribunal, Courts and Enforcement Act 2007 upon the subtenant, requiring the subtenant to pay its rent directly to the superior landlord to the extent of the arrears due from the immediate tenant.
If the subtenant fails to do so, the superior landlord can exercise CRAR and other remedies against it, so far as it is not prevented by the Covid-19 restrictions outlined above.
However, a landlord can only serve a valid section 81 notice on the subtenant where it is entitled to exercise CRAR against its immediate tenant. Plus, as things stand, to serve notice on a subtenant during the December quarter (25 December 2020 - 24 March 2021), the superior landlord’s immediate tenant must be in arrears of 366 days’ rent or more (as of 25 December).
CRAR
As part of the government’s implementation of measures to safeguard commercial tenants against aggressive rent collection tactics, the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 (the CRAR Regulations) prevent landlords from using CRAR unless an amount equal to 366 days' rent is overdue (as of 25 December).
Rent deposits
There are currently no Covid-19-related restrictions on recourse to a rent deposit.
The government’s code of practice for the commercial property sector (originally published on 19 June 2020) acknowledges that landlords can draw on rent deposits, but suggests that it is on the understanding that they will not require them to be topped up before it is "realistic and reasonable" to do so.
Whether a landlord is able to draw down on the deposit will depend on various factors, including the terms of the deed governing the deposit and how the deposit is held.
If the tenant has entered an insolvency process, there may be restrictions on drawing down on their deposit, although well-drafted rent deposit deeds avoid such restrictions by giving the landlord control of the deposit. This would make it a "financial collateral arrangement" (see Financial Collateral Arrangements (No 2) Regulations 2003).
However, where a tenant is in administration, landlords should seek advice on the status of the deposit, rent and other sums payable under the lease.
Debt recovery proceedings
There are currently no restrictions on landlords issuing claims under Part 7 or Part 8 of the Civil Procedure Rules in either the county courts or the High Court to recover arrears of rent from tenants.
Forfeiture – for reasons other than non-payment of rent
The Coronavirus Act 2020 imposed a suspension on the forfeiture of most commercial tenancies – those to which Part 2 of the Landlord and Tenant Act 1954 applies even if contracted out of the protection of that Act – on the grounds of non-payment of rent, which is defined as “any sum” due under a relevant lease, between 26 March 2020 and (currently) 31 March 2021.
This prevents landlords from exercising a right to forfeit a lease on the basis of a tenant’s non-payment of rent during this period.
As this suspension only applies to forfeiture on the basis of non-payment of rent, if a landlord has a right of forfeiture on any other grounds (including non-payment of other sums payable under the lease), it could still exercise this right should these grounds arise by way of peaceable re-entry (provided this is possible without using force against anyone present in the premises who opposes re-entry and does not involve evicting anyone lawfully residing at the premises).
Before exercising this right, landlords must first serve a notice on the tenant under section 146 of the Law of Property Act 1925.
Charging interest and recovering costs under leases
Most standard leases provide that where rent is unpaid, interest accrues on the unpaid sums at a specified rate. This will be payable in addition to the rent arrears at the end of the suspension period.
Most commercial leases provide that the tenant will be liable for the landlord’s costs of any notices under section 146 of the Law of Property Act 1925, and often for costs associated with claiming or recovering arrears of rent and any other action to remedy breaches.
Those provisions do not prevent the court exercising its jurisdiction to determine costs liability in any civil proceedings.
Statutory demands
Statutory demands can still be served but no winding-up petition can be presented for failure to make payment of sums demanded before 31 March 2021 under the Corporate Insolvency and Governance Act (CIGA). Statutory demands served since 1 March 2020 can now form the basis of a winding up petition after 31 March 2021, subject to any further extensions of the act’s provisions.
Where it can be demonstrated that a company is unable to pay its debts as they fall due, a winding-up petition can be presented after the current restrictions on doing so end, whether or not a statutory demand has been served.
Landlords should be aware that in the event a company is wound up, a landlord will usually be an unsecured creditor in the ensuing liquidation.
Under CIGA, it is still possible to present winding-up petitions if the creditor is able to show reasonable grounds for believing Covid-19 has not had a negative financial effect on the tenant company or that the tenant company would have been unable to pay its debts regardless of the financial effect of Covid-19.
CIGA also introduced a new moratorium process, which could be used to delay any winding-up petition.
Practical steps for landlords and tenants
As the Coronavirus Act does not defer or waive a tenant’s obligation to pay rent under a commercial lease, landlords are under no legal obligation to agree to a reduction in rent or rent holidays at the request of a tenant.
However, many landlords and tenants have had/are having conversations and reaching voluntary arrangements about rental payments which have fallen due, or are due shortly.
There may, for example, be commercial or reputational reasons why a landlord would want to engage with a tenant in respect of any request, particularly where this is necessary to avoid tenant insolvency.
When making requests for reductions in rent or rent holidays (in the case of a tenant) or considering a request (in the case of a landlord) parties are advised to consider:
- Seeking legal advice as soon as a request has been received, or it becomes clear that a difficulty in paying the rents due under a lease has arisen;
- The landlord and tenant's respective cash flows and ability to generate income during and following the coronavirus pandemic;
- The availability to both landlords and tenants of insurance and/or government assistance;
- The position under any loan facility or headlease;
- The nature of the request – i.e., whether the proposal is to defer, reduce or entirely suspend the rent and any proposal as to what could be done in the future; for example, stepped rent, future top ups of rent over a period or later in the term or changes to future rent review terms / other lease terms following recovery; and
- The availability of any rent deposit or guarantor.
For more information, please contact commercial real estate litigation specialists Antony Phillips, Owen Talfan Davies or Faye Hyland.