We are all well aware of the serious challenges being faced by businesses everywhere as we approach the one year anniversary of the first national UK lockdown coming into place. Hundreds of thousands of office buildings across the UK are still sitting empty as the majority of employees continue to work from home, and with no clear picture yet for when they may reopen, the future is uncertain for many commercial property owners.
What restrictions are in place for recovering rent that’s owed?
- Forfeiture of commercial leases
Although tenants are still liable to pay any rent that accrues while their premises are not being used, the government has prohibited landlords from forfeiting commercial leases for non-payment of rent. This will remain the case until 31 March 2021, unless the government extends the ban further.
- Commercial rent arrears recovery
Usually, when there are more than seven days’ rent outstanding on a property, landlords can use CRAR (commercial rent arrears recovery). However, to give tenants added protection during lockdown, this has been increased several times since the start of the pandemic. As it stands, landlords may not use CRAR unless the tenant has 366 days’ arrears.
- Statutory demands and winding up petitions
Landlords may not issue a winding up petition based on an unsatisfied statutory demand served between 1 March 2020 and 31 March 2021.
So what can a landlord do?
Despite these restrictions, a range of options remains open to commercial landlords who need to recover their rent:
- Recovery from former tenants and their guarantors
It may be possible to recover rent arrears from former tenants and their guarantors, but be aware of the controls and strict timescales on the use of this remedy imposed by the Landlord and Tenant (Covenants) Act 1995 (LTCA). If the lease was granted before 1 January 1996, a landlord can recover from the original tenant or any former tenant who has given a direct covenant to be liable for the remainder of the term or their respective guarantors. If the lease was granted on or after 1 January 1996, a landlord can recover arrears from the former tenant if they had given an Authorised Guarantee Agreement (AGA) or a guarantor who has guaranteed the performance of one under a ‘GAGA’.
- Recovery from existing guarantors
While 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. 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.
Where a tenant has sub-let its premises and the tenant is in arrears of rent under its lease, the CRAR procedure gives a superior landlord a right to service a notice under section 81 of the Tribunal, Courts and Enforcement Act 2007 requiring the subtenant to pay rent directly to them rather than their immediate landlord. This will only be possible if the superior landlord’s immediate tenant is in arrears of 366 days or more.
Depending on the terms of the lease, landlords may be able to draw down on the rent deposit. However, government guidance says that landlords should not require tenants to ‘top up’ deposits “before it is realistic and reasonable to do so”.
There are currently no restrictions on landlords issuing court proceedings for a money judgement. However, it is worth noting that enforcing that judgment may be made difficult by the restrictions put in place on bailiffs entering properties and winding up petitions.
- Forfeiture for other breaches of lease
During lockdown, commercial landlords may still forfeit leases for breaches of lease other than rent arrears, for example, disrepair or subletting without consent. However, tenants may still seek relief from forfeiture and some judges may be more lenient in granting relief if the tenant shows that the breach was as a result of Covid-19 and/or lockdown.
- Some winding-up petitions are still possible
It is still possible to issue a winding up petition based on something other than a statutory demand served during the Relevant Period. This could be, for example, as a result of a court judgement or statutory demand served before 1 March 2020. If you do this, however, you have to show that Covid-19 has not worsened the tenant’s financial position, or that they could not pay their debts even if there had been no worsening of their financial position.
Remember to consider your options carefully
While commercial landlords are entitled to take a hard line with their tenants, they are being encouraged to follow the Government’s voluntary Code of Practice and where possible, try to agree practical and commercial solutions to try and help them navigate the remainder of the crisis.
While it might be tempting to try to recover the money you are owed, it is worth remembering that any action you take now might help your tenant to survive this economic downturn. This would not only make them more likely to be able to pay rent in the future but also would avoid you having vacant premises with uncertainty over prospects to re-let in the post-Covid environment.
If you are a commercial landlord and are looking for advice on what to do about your tenant’s rent arrears during lockdown, please contact James Young at Harding Evans Solicitors on 01633 244233 or email hello@hevans.com.
