In December 2020, the Government extended the protections for commercial tenants and the restrictions on filing statutory demands and winding up petitions for COVID-19 related debts until the end of March 2021. The Government stated that the extensions will allow “businesses sufficient breathing space to pay rent owed", but the Government's announcement referred to these extensions as being the "final extensions".

It should be noted that none of the Government’s measures removes or reduces the obligation to pay rents or other sums due under a lease.  The Government’s measures instead either defer the payment obligation or delay the landlord’s enforcement options.

According to the Government, “further guidance to support negotiations between landlords and tenants will be published shortly". This guidance will sit alongside the existing Code of Practice for commercial property relationships during the COVID-19 pandemic.  That Code of Practice can be viewed here.

In addition, the Government has announced its intention to conduct a review of "the outdated commercial landlord and tenant legislation, to address concerns that the current framework does not reflect the current economic conditions" which will consider "how to enable better collaboration between commercial landlords and tenants and to improve the leasing process to ensure our high streets and town centres thrive as we recover from the pandemic and beyond” and “a broad range of issues including the Landlord & Tenant Act 1954 Part II, different models of rent payment, and the impact of Coronavirus on the market”.

If you would like to discuss any particular situations with one of our experts, please get in touch with a member of the Property Litigation team at Knights.

REMEDYDESCRIPTIONSTATUS

Interest

The non-payment of rent due under a lease will often trigger a contractual obligation to pay interest on the unpaid sums.

This has not been affected, albeit the accrual of interest does not in and of itself result in any cash recovery by a landlord from a tenant.

Rent deposit

Drawing down monies from a rent deposit to discharge rent arrears.

Where such a draw down is made, there is usually a requirement for the tenant to top up the deposit by replacing the amount withdrawn.

In general terms, it will remain possible to draw down on a rent deposit where relevant sums have not been paid[1].  Landlords should carefully check the terms of the rent deposit deed for the detailed requirements and any restrictions.

In the current climate, it should be recognised that a tenant may not top up the deposit if any sums are drawn down.  It may therefore be preferable for landlords to exhaust other potential remedies before resorting to this one.

Recovery from a guarantor of the current tenant

Pursuing a guarantor of the current tenant under the existing lease for sums due in the event of default by the current tenant.

It will remain possible for landlords to pursue guarantors (albeit subject to the restrictions mentioned below which may make this remedy of limited value).

This remedy is only effective if the guarantor is solvent.

It should be noted that there may be considerable practical difficulties in taking enforcement action if the guarantor is domiciled in another jurisdiction.

Recovery from a former tenant or former guarantor

Pursuing a former tenant or former guarantor for “fixed charges” (e.g. rent) due under the lease.

It will remain possible for landlords to pursue former tenants or former guarantors (albeit subject to the restrictions mentioned below which may make this remedy of limited value).

This remedy is only effective if the former tenant or former guarantor in question is solvent.

It should be noted that a section 17 notice must be served on the former tenant or former guarantor within 6 months of the fixed charge falling due and that, if a former tenant or former guarantor makes a payment, it will be entitled to an overriding lease.

Commercial rent arrears recovery (CRAR)

 

CRAR is a statutory procedure which allows for the seizure and subsequent sale of a tenant’s goods to recover arrears.

CRAR applies only to principal rent plus interest and VAT.  It does not apply to service charge or to insurance, even if they are reserved as rent.

The minimum net unpaid rent that must be outstanding before CRAR can be exercised is 276 days’ rent where CRAR was exercised between 29 September 2020 and 24 December 2020 and is 366 days’ rent where CRAR is exercised between 25 December 2020 and 31 March 2021[2].

Prior to the Government’s intervention, the threshold for exercising CRAR was usually 7 days’ rent arrears.

It should be noted that the CRAR procedure is only effective if the tenant has assets of value situated at the premises.  In addition, the tenant has to be given advanced warning of the CRAR procedure being deployed as a landlord must serve an initial CRAR enforcement notice on the tenant.

Recovery from a subtenant

Exercising the right to require a subtenant to pay rent that it owes directly to the superior landlord rather than to its direct landlord by the superior landlord serving a section 81 notice on the subtenant.

Where premises are underlet, it remains possible for a superior landlord to require a subtenant to pay its rent directly to the superior landlord to discharge arrears of principal rent (plus VAT and interest) owed to the superior landlord by the intermediate tenant.

However:

·         276 days’ net rent must be outstanding from the intermediate tenant to the superior landlord if a section 81 notice was served on the subtenant before 24 December 2020; and

·         366 days’ net rent must be outstanding from the intermediate tenant to the superior landlord where a section 81 notice is served on a subtenant between 25 December 2020 and 31 March 2021.

Forfeiture

Exercising a landlord’s right to terminate a lease during the

term and recovering possession of the premises.

The Coronavirus Act 2020 prevents forfeiture for non-payment of rent until 31 March 2021 in both England and Wales[3].

Alternative enforcement action taken by the landlord before 31 March 2021 will not result in a waiver of any accrued right to forfeit for non-payment of rent unless the landlord expressly waives its right to forfeit in writing.

The right to forfeit for other breaches of a lease remains unaffected.

Statutory demand

A formal demand which requires a tenant to discharge arrears of rent within 21 days, failing which the landlord will commence winding up proceedings.

Statutory demands served on or after 1 March 2020 cannot form the basis of a winding-up petition presented at any point after 27 April 2020.  This restriction will remain in place until 31 March 2021.

Winding up petition

Presentation of a petition to the Court requesting an order that the tenant be compulsorily wound up.

Between 27 April 2020 and 31 March 2021, a landlord cannot issue or present a petition against a tenant company on the grounds that it is unable to pay its debts, unless the landlord has reasonable grounds for believing and can persuade the Court that:

·         COVID-19 has not had a “financial effect” on the tenant; or

·         the tenant would have been unable to pay its debts regardless of the financial effects of COVID-19[4].

It may well be difficult for a landlord to be able to satisfy either of those requirements due to it having a lack of detailed information about the tenant company.

Court proceedings

Issuing debt proceedings in the County Court or in the High Court against the tenant to recover the arrears.

Landlords can generally continue to issue Court proceedings to recover sums due under a lease[5].

However, debt claims can be protracted and expensive.  In addition, enforcement of any judgment obtained may be difficult.

[1] It should, however, be noted that certain types of deposit may be protected from draw down where a tenant is subject to the new statutory moratorium under the Corporate Insolvency and Governance Act 2020 (CIGA 2020).

[2] There is a separate restriction on CRAR if the tenant is subject to the statutory moratorium under CIGA 2020.

[3] There is a separate restriction on forfeiture if the tenant is subject to the statutory moratorium under CIGA 2020.

[4] There is a separate restriction on winding up if the tenant is subject to the statutory moratorium under CIGA 2020.

[5] If the tenant is subject to the statutory moratorium under CIGA 2020 or if the tenant is subject to any other insolvency regime, there are restrictions on Court proceedings against the tenant.