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Landlord’s options for non-payment of commercial rent during the Coronavirus outbreak
In normal times, a tenant who does not pay rent in accordance with the terms of a commercial lease is under immediate risk of forfeiture by the Landlord. Most leases contain a forfeiture re-entry clause which allows the Landlord to bring the lease to an end if any rents as defined by the lease are unpaid for a certain period of time (usually 14 – 28 days). The Landlord forfeits the lease by re-entering the premises and changing the locks so as to exclude the tenant or serving Court proceedings. Often no advance warning is necessary and therefore the advice to tenants has always been to prioritise payment of commercial rent. However, as part of the measures aimed to help businesses to trade through the coronavirus pandemic, the government has imposed a moratorium on forfeiture in commercial leases with a term of more than 6 months. The moratorium was imposed by The Coronavirus Act 2020 and it currently applies until 30 June 2020 but the government has the option to extend that period if needed.
There is no distinction as to when the arrears accrued or why, so it makes no difference to the suspension of the Landlord’s right to forfeit that the arrears might pre-date the pandemic or that the pandemic is not the cause of a tenant’s inability to pay the rent.
The Coronavirus Act moratorium also excludes the special procedures under Commercial Rent Arrears Recovery (CRAR) which certificated bailiffs to recover unpaid rent by removing and selling the tenants goods (formerly known as distraint) without a Court judgment.
The moratorium does not however prevent the landlord from bringing a debt claim in the County Court to obtain a County Court Judgment which can then be enforced or from taking insolvency proceedings by serving a statutory demand and ultimately petitioning to bankrupt an individual tenant or to wind up a company tenant in an insolvent liquidation.
Whilst some landlords will be under financial pressure themselves and might need to take immediate legal action to protect their own position with lenders, very careful consideration has to be given before deciding to forfeit a lease or to force a tenant company a tenant into insolvency. Forfeiture is effectively an immediate Lock-out eviction which brings the lease to an end. Whilst some tenants will want to reopen premises and would then be forced to agree terms for relief from forfeiture, the ultimate position is that the landlord is likely to have an empty property on its hands with void liabilities such as insurance and business rates. The same will happen if the tenant is made bankrupt or wound up through an insolvent liquidation. The bankruptcy trustee or the liquidator will disclaim the lease which brings it to an immediate end.
There is some breathing space for Landlords with a rent deposit where rent can still be drawn down during the moratorium period and when the moratorium is lifted the tenant will be liable to forfeiture if they do not reinstate the rent deposit account. Also, there is no restriction on legal action being taken against guarantors or former tenants under an Authorised Guarantee Agreement. This can bring significant pressure to bear on the tenant to pay the rent in order to avoid enforcement against 3rd party guarantors. There are strict statutory time limits and notice requirements for claims under Authorised Guarantee Agreements and most contractual guarantees have notice requirements so it is very important not to overlook them during the moratorium period. Even if the Landlord does not intend to take immediate enforcement action against the guarantor for the time being, notice of arrears must still be given within the prescribed time limits in order to safeguard the Landlord’s position under the guarantee.
Ultimately, the financial viability of tenants will be a significant concern to landlords particularly those in the retail, leisure and hospitality sectors. The forfeiture moratorium is potentially encouraging tenants to store up future liabilities that they will not be able to meet. Whether the various forms of other financial assistance such as suspension of business rates, CBIL loans and grant funding will be sufficient to see these tenants through the ongoing economic uncertainties that will follow even after lockdown is lifted is another story and Landlords will have some very difficult decisions to make.
We have an experienced property litigation team who can advise both landlords and tenants about their legal position and options around rent arrears. Often early advice & action is crucial. For further information please contact:
Jon Wilby – Litigation Team or
Daniel Blood – Commercial Property
Disclaimer – This article contains information on current legal issues applicable at the time of printing. Please note there may have been changes subsequently which have not been incorporated into the material. This article is intended for information purposes only and its content should not be applied to any particular set of facts or relied upon without legal or other professional advice.