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Commercial rent arrears, forfeiture and the Coronavirus Act 2020

News / / Commercial rent arrears, forfeiture and the Coronavirus Act 2020

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].

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

A landlord is not prevented from taking other action against tenants for non-payment of rent including:

  • the commencement of debt recovery proceedings
  • serving a statutory demand, or 
  • commencing insolvency proceedings 

because these are not steps being taken to evict a tenant.

Insolvency proceedings/CLLS recommendation paper/Companies Court

In relation to insolvency proceedings it is worth noting that the Insolvency Committee of the City of London Law Society (CLLS) has recently submitted a paper to the Insolvency Service entitled Proposals for mitigating the short term effects on viable businesses of COVID-19’ suggesting a number of temporary changes to UK insolvency law. 

The proposed changes include introducing a process where directors submit a ‘COVID-19 Declaration’ which would trigger a 90 day grace period and would render any winding-up petition presented within the grace period to be invalid, unless pre-approved by the court.  A further proposed change is to amend the circumstances in which a company is deemed to be unable to pay its debts under section 123(1) Insolvency Act 1986 so that a company cannot be deemed to be unable to pay its debts for a period of three months from the date of a COVID-19 Declaration, thereby giving it temporary relief from a winding-up order. 

We have noted from the government’s press release on 28 March 2020 that it does intend to introduce new insolvency legislation to provide assistance to companies in difficulty as a consequence of COVID-19.  As of writing these new laws have not yet been made and we wait to see whether the government takes notice of the CLLS paper and brings in the new temporary legislation that the paper recommends.   

CRAR method

Similarly, it does not appear to us that a landlord would be prevented from taking steps to recover rent by means of the commercial rent arrears recovery (CRAR) method of enforcement (governed by the Tribunals Courts and Enforcement Act 2007 (2007 Act).  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.  Whether there are enforcement agents available in the current lock-down is a different question and there are also likely to be practical difficulties in gaining access to a building which is closed. 

CRAR also gives a landlord the right to recover from any undertenant (or indeed a sub-undertenant) the rent that is due from its immediate tenant. Once a notice pursuant to section 81 of the 2007 Act has been served on the undertenant, the undertenant must pay its rent directly to the superior landlord until the notified amount has been paid, or the notice has been replaced or withdrawn. 

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.  

Although we do not consider that a landlord can be prevented from seeking to recover outstanding rent using the processes highlighted above, 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 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 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 after the Coronavirus lockdown is over. 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 during this crisis. 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 deferral 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.

Ian Chappell

Ian Chappell Partner, Deputy Head of Real Estate

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