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Commercial rent arrears, forfeiture and the Coronavirus Act 2020

31.03.2020 Real estate

Ian Chappell

Ian Chappell Partner, Deputy Head of Real Estate

Susan Haggard

Susan Haggard Partner, Head of Real Estate

This article was update on 4 May to reflect the temporary changes to the CRAR legislation and prospective temporary changes to insolvency legislation. The rest of the content of this article remains the same.

The Coronavirus Act 2020 (the Act) received royal assent on 25 March 2020 and is now law. This new legislation followed the government’s earlier press release which confirmed that “Commercial tenants who cannot pay their rent because of the coronavirus will be protected from eviction” [our emphasis]. Since then further measures have been introduced or are due to be introduced to offer additional protections for commercial tenants.

Forfeiture/eviction

The protection to business tenants provided by the Act is that no right of re-entry or forfeiture for non-payment of rent may be enforced in any way until 30 June 2020 or such later date as the Secretary of State may specify (Relevant Period).

This means that no steps can be taken during the Relevant Period to effect peaceable re-entry by entering rented commercial premises and changing the locks or commencing legal proceedings at court seeking an order for possession.

Commercial tenants therefore have a minimum 3 month hiatus during which they know that they cannot be removed from their rented premises.  The Act does not differentiate between a poor or rich tenant.  The moratorium against forfeiture applies to all tenants whatever their circumstances.

In relation to any existing litigation based on forfeiture for rent arrears, the tenant cannot be evicted until the end of the Relevant Period.

There was some initial uncertainty under the Bills published prior to the Act as to whether accepting or demanding rent during the Relevant  Period might amount to a waiver of the Landlord’s right to forfeit a lease after the Relevant Period.  That uncertainty has now been resolved by Section 82(2) of the Act which provides:

“During the relevant period, no conduct by or on behalf of a landlord, other than giving an express waiver in writing, is to be regarded as waiving a right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent”.

Consequently unless there is an express waiver in writing from the landlord, any action the landlord takes to recover the rent arrears during the Relevant Period (which ordinarily would have been seen as affirming the lease and a waiver of the right to forfeit) will not amount to such a waiver.

Other action for non-payment

Insolvency

At present whilst landlords are not prevented from taking other action against tenants for non-payment of rent through, for example, the commencement of traditional debt recovery proceedings in the county court, the Government has stated that it is proposing to introduce additional emergency legislation to prevent landlords from using statutory demands (made between 1 March and 30 June 2020) and winding-up petitions (presented from and including 27 April to 30 June 2020) where a tenant cannot pay its bills due to COVID-19.

CRAR method

The Government has already supplemented its initial protection for business tenants by passing emergency legislation restricting the ability of landlords to take steps to recover rent by means of the commercial rent arrears recovery (CRAR) method of enforcement. 

CRAR allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears.  

The new legislation (The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020) came into force on 25 April. It provides that during the period in which the new statutory protections from forfeiture are in place landlords will only be able to utilise CRAR if the amount of rent outstanding is an amount equivalent to at least 90 days’ rent.

Conclusion

The Act makes it clear that it is not lawful to forfeit a lease by peaceably re-entering commercial premises or commencing legal proceedings for possession within the Relevant Period.  The additional legislation which was introduced on 25 April and the new proposed legislation relating to insolvency procedures do and will provide extra protection for commercial tenants.
Although certain enforcement procedures may remain open to landlords in certain circumstances they are not going to work to secure payment if a debtor (tenant, or otherwise) cannot pay, at least in the short term.

Cash flow for many tenants is likely to remain challenging after the Relevant Period has expired and the lockdown period ends or is eased allowing businesses to return to their premises, at which point the March and June quarters' rent may well be outstanding.  

Once the Relevant Period comes to an end landlords will be free to take action to forfeit leases for non-payment of rent but they may want to think twice before doing so. The economic climate is likely to have changed beyond recognition, at least in the short term, and despite the various schemes of help being provided by the government, many businesses may never recover. Against that backdrop securing new tenants may not be easy.
   
Similarly after the COVID-19 lockdown is over it would make little sense for landlords to commence insolvency proceedings against their tenants who have cash flow problems caused by the current crisis before allowing them time to get their businesses and finances back on track. The service of a statutory demand in normal times can be enough to force late payers to clear their debts but we are living in different times. Unless a landlord is confident that a particular tenant remains cash rich then we suggest that landlords should think carefully before taking any action which might push their tenants into insolvency. If a tenant owes multiple debts to third parties, being the (unsecured) creditor who pulls the trigger brings no commercial advantage over other unsecured creditors.  

Landlords may therefore consider that their interests are better served by coming to a formal arrangement that:

  • allows tenants to pay rent in instalments on a temporary basis; or 
  • defers the current rent payments until after the crisis is over and then allows tenants to pay down the deferred sums  over a period of time; or
  • provides for the  landlord to “share the tenant’s pain” by making a temporary rent reduction.

This could also be the opportunity for landlords to obtain a concession from their tenants as a quid pro quo. We are aware of at least one case where the landlord has agreed to a rental payment suspension in return for the tenant agreeing to vary its lease to remove the tenant’s break option.

Legal advice should of course be obtained before entering into any such agreements to ensure such arrangements remain temporary, the landlord’s interests are properly protected and any consents required from a lender (if the property is mortgaged) are obtained.

Article authors:

Ian Chappell Susan Haggard