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Recovering commercial rent arrears

01 February 2021 | Richard Gore

The COVID-19 pandemic and the subsequent government restraints introduced, have caused a significant challenge for commercial landlords in recovering rent arrears.

Whilst several measures have been introduced to assist commercial tenants, they are still obligated to pay rent, as does the obligation to pay interest due under the terms of the lease.  As such, tenants continue to experience difficulties.

Head of Dispute Resolution Richard Gore, and solicitor Holly Snook explain in more detail what actions landlords can take to recover rent arrears.

 

What can the Landlord do?

Forfeiture of the lease

The Coronavirus Act 2020 came into force on 31 March 2020 and provides (for most commercial leases) a moratorium which currently prevents Landlords in England, Wales and Northern Ireland from forfeiting a commercial lease for non-payment of rent (to include a service charge, insurance rent and all other outgoings under a lease) until 31 March 2021, whether by proceedings or peaceable re-entry.

However, landlords can still demand rent and deal with requests for consent under the lease without waiving the right to forfeit for non-payment of rent during the moratorium period.

Whilst the moratorium applies, landlords retain the right to charge interest on the rent arrears in accordance with the rate specified in the lease.

Forfeiture by peaceable re-entry would still be available to a landlord for breaches unrelated to non-payment of rent or other sums due. In that instance landlords would need to stop demanding rent or taking any other action consistent with the continuation of the lease and would need to serve an appropriate notice.

However, in the case of forfeiture or indeed a surrender of the lease a landlord may be left with an empty property which may not be attractive in the current climate.

 

Commercial Rent Arrears Recovery (CRAR)

This involves sending bailiffs to the Premises to seize’ tenant’s goods on site and sell them to recover an equivalent value to the unpaid rent. 

From 25 December 2020, the minimum amount of net unpaid rent required before you can exercise CRAR in England and Wales is an amount equal to 366 days rent (having increased from 7, 90, 189 and 276 days respectively).  This restriction applies until 31 March 2021, or such later date specified in the Taking Control of Foods and Certification of Enforcement Agents (Amendment) Coronavirus) Regulations 2020.

 

Statutory Demands/Winding Up petitions

The Corporate Governance and Insolvency Act (“the Act”)which came into force on 26 June 2020, imposes a temporary halt on the use of statutory demands for payment (made from 1 March 2020 until 31 March 2021).

It also prevents (in England, Wales, Scotland, or Northern Ireland) the presentation of petitions to wind up a company from 27 April 2021 to 31 March 2021, based on an unsatisfied statutory demand served on or after 1 March 2020.  If a petition is presented and it appears to the court that coronavirus has had a financial effect on the debtor, the Act prevents a winding-up order being made unless the court is satisfied the debtor could not have paid its debts even if there had been no such financial effect.

 

Recovery from former tenants and guarantors

Subject to the terms of the lease and guarantee (and subject to CRAR above) it may be possible to recover sums due under the lease from former tenants and their guarantors, existing guarantors or an undertenant.  However, to serve notice on a subtenant during the December quarter (25 December 2020 – 24 March 2021), the superior landlord’s immediate tenant must be in arrears of 366 days’ rent or more (as of 25 December 2020).

 

Drawing upon a rent deposit

The government’s Code of Practice for Commercial Landlords and Tenants, first published on 19 June 2020, indicates that Landlords may (depending on various factors to include the terms of the deed governing the deposit and how the deposit is held) be able to draw from rent deposits, but only on the understanding that the landlord will not then require that the deposits be “topped up” by the tenant “before it is realistic and reasonable to do so”.

There also may be restrictions in place where the tenant has entered an insolvency process, or where the tenant is in administration.

 

Debt recovery proceedings

There are currently no restrictions on landlords issuing claims in the County Court and the High Court to recover arrears of rent from tenants, although in some circumstances there are limits on the enforceability of judgment debts arising from the court proceedings.

 

A collaborative approach

Whilst landlords are under no legal obligation, the Code of Practice for Commercial Landlords and Tenants encourages both landlords and tenants to work collaboratively to find a temporary and sustainable recovery plan.  There may be commercial or reputational reasons for the parties to engage with each other in this way.

 

Rent deferral/reduction/holiday/payment terms changes

The guidance states that tenants seeking concessions should be clear with their landlords about why this is needed. This means being prepared to be transparent and explaining their request. Landlords should provide concessions where they reasonably can, considering their own fiduciary duties and financial commitments.

Solutions include:

  • Full or partial rent-free period for a set number of payment periods.
  • Deferral of the whole or part of the rent for one or more payment periods.
  • The payment of the rents over shorter payment periods for a set time (e.g. monthly rather than quarterly) including provision for their payment in arrears.
  • Rental variations to reduce ongoing payments to a current market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site, incorporating any period during which the site was closed.
  • Landlords drawing from rent deposits on the understanding that the landlord will not then require that the deposits be “topped up” by the tenant before it is realistic and reasonable to do so.
  • Reductions in rent, either in whole or part, across other units occupied by the tenant and owned by the landlord, as part of a negotiated agreement applying to a portfolio of units.
  • Landlords waiving contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable.
  • Provisions for ending the solutions on a fixed date, or on reaching the trigger point of circumstances.
  • Tenants and landlords agreeing to split the cost of the rent for the unoccupied period between them.
  • Any of the above in return for other arrangements e.g. a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, or an extension of the lease.

In considering an agreement, various factors would need to be considered, such as:

  • The closure period or restricted trading impacting the tenant’s business
  • The tenant’s ability to trade via other means.
  • Additional costs to protect customers to adhere to social distancing requirements.
  •  The needs of stakeholders, suppliers, and employees.
  • Government support or concessions already received and/or agreed and the tenant’s previous track record under the terms of its’ lease.

 

In every instance, it is recommended that before landlords and tenants take any action, they seek advice as to the options available in their specific situation.  

If you are experiencing difficulties in recovering rent arrears and would like advice about how to best navigate any of these aspects, our Dispute Resolution legal team is on hand to help. To discuss your situation please call: Call 0117 906 9400 or email hello@gl.law

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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