Out-Law Guide | 29 Jun 2020 | 5:14 pm | 15 min. read
Landlords in England and Wales retain scope to recover rent and other sums due to them under commercial lease agreements despite coronavirus legislation, guidance and practice directions issued in the UK restricting some of their options. The options open to landlords in Scotland are different from those in England and Wales and are addressed in a separate guide.
Depending on the specific circumstances landlords find themselves in, remaining options might include recovering sums owed by tenants of commercial property from former tenants, guarantors, recovering them directly from subtenants, or through debt recovery proceedings, among other examples.
On 19 June 2020, the government published a code of practice for landlords and tenants of commercial property across the UK. The code is voluntary, but has been endorsed by a number of organisations including the RICS. The main principle of the code is "transparency and collaboration", and the government's aim is to encourage landlords and tenants to act "reasonably and responsibly".
The restrictions imposed during the Covid-19 crisis on landlords' remedies for recovery of sums due from tenants include:
Despite these restrictions, a range of options remain open to landlords.
A landlord may be able to recover rent arrears and other sums due under the lease from former tenants and their guarantors. However, landlords must be aware of the controls and strict timescales on the use of this remedy imposed by the Landlord and Tenant (Covenants) Act 1995 (LTCA).
In short, if the lease is an 'old lease' – i.e. one which was granted prior to 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 is a 'new lease' – i.e. one which was granted on or after 1 January 1996 – a landlord can recover arrears from the former tenant if that former tenant had given an Authorised Guarantee Agreement (AGA), or from a guarantor who has guaranteed the performance of one under a 'GAGA'.
In order to pursue a former tenant or their guarantor under either old or new leases, the LTCA requires a landlord to first serve a formal ‘section 17 notice’ in a prescribed form within six months of a ‘fixed charge’ falling due. A ‘fixed charge’ includes rent, service charges and any other liquidated sums due under a lease and interest due on those fixed charges. A failure to serve a valid section 17 notice within that six month period will result in the landlord losing its right to pursue those who have retained liability for any breaches of covenants to pay fixed charges by the current tenant.
A former tenant or guarantor that receives a valid section 17 notice will be required to pay the arrears and any interest that has accrued which was set out in that notice.
Before serving a section 17 notice, a landlord should be aware that a former tenant or guarantor who pays all the sums set out in the notice has a right under section 19 of LTCA to call for an "overriding lease". This new lease is inserted between the interests of the landlord and the existing tenant, converting the existing tenant into a subtenant. This allows the former tenant or guarantor to pursue the existing tenant for the debt, including by seeking to forfeit the lease, subject to the current restrictions outlined. A landlord should therefore only serve a section 17 notice on someone it would be prepared to have as a tenant going forwards under an overriding lease.
The recent changes introduced in response to the coronavirus pandemic do not prevent the service of a section 17 notice. However, if a former tenant or guarantor fails to comply with those notices, a landlord’s ability to pursue other remedies will be restricted due the coronavirus restrictions.
Where 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. A landlord should 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. For example, a landlord may only be able to call on a guarantee in particular circumstances, for a specified period or only after the tenant itself has been pursued. In some guarantees, a landlord may have the option to require the guarantor to take a new lease and, if well drafted, the rent under the new lease will be backdated to the service of a trigger notice on the guarantor.
When agreeing any rent concession letters landlords should check the guarantee provisions do not operate to release guarantors where such concessions are given. Most provisions are drafted to avoid this risk.
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 serve a notice under section 81 of the Tribunal, Courts and Enforcement Act 2007 upon its subtenant requiring the subtenant to pay its rent directly to the superior landlord rather than to its own landlord to the extent of the arrears due from the immediate tenant. If the subtenant fails to do so, the superior landlord can exercise CRAR and other remedies against it, so far as not restricted by the coronavirus restrictions. CRAR allows landlords, upon giving advance notice, to seize a tenant's or subtenant's goods from the demised premises to recover unpaid rent.
Importantly, a landlord can only serve a valid section 81 notice on the subtenant where it is entitled to exercise CRAR against its immediate tenant. As part of the UK government’s implementation of measures to safeguard against aggressive rent collection tactics, the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 (the CRAR Regulations) prevented landlords from using CRAR unless an amount equal to at least 90 days’ rent was overdue; from 24 June this has been increased to at least 189 days' rent. This means that to serve notice on a subtenant, the superior landlord’s immediate tenant must be in arrears of 189 days’ rent or more. That is the case even if the superior landlord has no intention of exercising CRAR against its immediate tenant.
As part of the government’s implementation of measures to safeguard against aggressive rent collection tactics, the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 (the “CRAR Regulations”) prevented landlords from using CRAR unless an amount equal to 90 days’ rent was overdue (it had previously been seven days or more). From 24 June, CRAR cannot be used unless an amount equal to 189 days' rent is overdue.
This means that a tenant who failed to pay rent on the June 'quarter day' of 24 June 2020 would not be exposed to CRAR until 31 December 2020 at the earliest.
Many commercial leases require the tenant to pay a rent deposit. There are no coronavirus-related restrictions on recourse to a rent deposit. However, the government code of practice acknowledges that landlords can draw on rent deposits, but suggests that it is on the understanding that they will not require them to be topped up before it is "realistic and reasonable" to do so. Whether a landlord is able to draw down on the deposit will depend on various matters including most importantly the terms of the deed governing the deposit and how the deposit is held. If the tenant has entered an insolvency of some kind then there may be restrictions on drawing down on that deposit, although well drafted rent deposit deeds will avoid such restrictions by giving the landlord control of the deposit. This would make it a "financial collateral arrangement" for the purposes of the Financial Collateral Arrangements (No 2) Regulations 2003.
If there is any ambiguity about the drafting of the deposit deed in the event of tenant insolvency and tenant insolvency is anticipated, landlords could consider drawdown where they have the right to do so to avoid any risk that they will be unable to do so if the tenant does enter an insolvency procedure.
Landlords should also be aware that where a tenant is in administration, rent and other sums may be payable by the administrator as an expense of the administration and rank in precedence to claims of other unsecured creditors. If a landlord has recourse to the rent deposit rather than requiring the administrator to pay rent or other sums as an expense of the administration, the administrator will not, in line with recent case law, be subject to any obligation under the deposit deed to 'top up' the deposit following a withdrawal. In that situation it may be better to preserve the deposit to meet other potential claims, such as dilapidations, which do not qualify as expenses of the administration.
There are currently no restrictions on landlords issuing claims under Part 7 or Part 8 of the Civil Procedure Rules in either the county courts or the High Court to recover arrears of rent from tenants.
Where elements of or all of the rents due under the terms of the lease is subject to a proviso that the tenant is not entitled to exercise a right of set-off, deduction or counterclaim in respect of rent payments, it may, in many 'Part 7 cases', be possible for a landlord to seek 'summary judgment' on its claim. Summary judgment is a means of applying for a determination of a claim where the defendant has no real prospect of defending the claim and there is no other compelling reason why the claim should proceed to trial. The existence of a prohibition on set-off, deduction or counterclaim will often mean there is no real prospect of a tenant successfully defending a claim, particularly a claim for principal rent.
A rent arrears claim and an application for summary judgment on that claim, or the threat of such, can be a useful weapon in a landlord's suite of remedies, particularly in the absence of the right to forfeit, for three main reasons:
The Coronavirus Act 2020 imposed a suspension on the forfeiture of most business tenancies – those to which Part 2 of the Landlord and Tenant Act 1954 applies even if contracted out of the protection of that Act – on the grounds of non-payment of rent, which is defined as all sums due under a relevant lease, between 26 March 2020 and 30 June 2020. That period has now been extended to 30 September 2020. This means that a landlord cannot exercise a right to forfeit a lease on the basis of a tenant’s non-payment of rent during this period.
It is worth noting that during the period of suspension, a landlord will not be regarded as waiving its right to forfeit for non-payment of rent unless it expressly confirms such a waiver in writing. As a result, once the suspension period has expired, the landlord could forfeit the lease on the basis of the tenant’s non-payment of the rent which accrued during the suspension if this remains unpaid.
As this suspension only applies to forfeiture on the basis of non-payment of rent, if a landlord has a right of forfeiture on any other grounds, it could still exercise this right should these grounds arise by way of peaceable re-entry where this is possible without using force against anyone present in the premises who opposes re-entry and where it does not involve evicting anyone lawfully residing at the premises. Where the premises comprise some residential element this means forfeiture by peaceable re-entry is unlikely to be possible.
It is also possible to commence proceedings for forfeiture for breaches other than failure to pay sums due under a lease. However, proceedings of this kind will be subject to the automatic stay which applies to possession proceedings.
Landlords should be aware that if they wish to exercise a right of forfeiture of this nature, they must first serve a notice on the tenant under section 146 of the Law of Property Act 1925 (LPA 1925). That notice must give the tenant a reasonable amount of time to remedy the breach, if they are capable of doing so, and it is only after that reasonable period of time elapses that a landlord is entitled to forfeit the lease. The tenant may also apply to the court for relief from forfeiture.
Clearly in the current climate a landlord should consider the risk of a possible void and its rates liability in deciding whether forfeiture is a desirable option.
Although landlords are not able to forfeit a lease on the grounds of non-payment of rent during the period of suspension, the tenant is still liable for rent during this period. Most standard leases provide that where rent is unpaid, interest accrues on the unpaid sums at a specified rate. This will be payable in addition to the rent arrears at the end of the suspension period.
Additionally, most commercial leases provide that the tenant will be liable for the landlord’s costs of any notices under section 146 of the LPA 1925 and also often for costs associated with claiming or recovering any arrears of rent and any other action to remedy breaches. Those provisions do not prevent the court exercising its jurisdiction to determine costs liability in any civil proceedings.
These can still be served but no winding-up petition can be presented for failure to make payment of the sums demanded before 30 September 2020 now that the Corporate Insolvency and Governance Act (the CIG Act) has come into force. Statutory demands served since 1 March can form the basis of a winding up petition after 30 September, subject to any extension of that period under the Act.
However, where it can be shown a company is unable to pay its debts as they fall due, a winding-up petition can be presented after the current restrictions on doing so end, whether or not a statutory demand has been served.
Landlords should be aware that in the event a company is wound up, a landlord will usually be an unsecured creditor in the ensuing liquidation and the liquidator will have the right to disclaim the lease.
Under the CIG Act it is still possible to present winding-up petitions if the creditor is able to show reasonable grounds for believing that coronavirus has not had a financial effect on the tenant company or that the tenant company would have been unable to pay its debts regardless of the financial effect of coronavirus. For these purposes the "financial effect" test will be met "if (and only if) the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus". Due to the evidential difficulty in proving this it is likely in practice that it will only be possible to present a winding-up petition for debts which pre-date the coronavirus crisis and where it can be shown the tenant company was unable to pay its debts regardless of any financial impact of coronavirus.
In addition, the CIG Act introduces a new moratorium process which could be used to delay any winding-up petition.
Where tenants are in administration, rent and other sums due under the lease are payable as an expense of the administration – i.e. ahead of other creditors – where the premises are used for the benefit of the administration. It is clear this is the case where the tenant continues to operate its business from the premises whether because it is being sold, stock is being sold or the business is winding down in an orderly fashion. The rent for these purposes is payable as an expense of the administration for the period of such occupation only and treated as accruing on a daily basis.
During the coronavirus period where rented premises are forced to close the question arises whether rent should be an expense of administration where, although closed, stock and equipment remains on the premises and there is an intention that the premises will re-open.
The coronavirus-related restrictions have not removed the liability to pay rent and so it continues to be due. Where premises are being used to store stock, furniture and equipment, where the tenant intends to re-open them or to sell them as part of any sale of its business and where employees are been furloughed – which requires there to be an intention to re-hire them – then it is likely rent continues to be an expense of any administration of the tenant.
However, there has been a recent Australian case where it was held rent was not an expense of the administration for a brief period of closure related to coronavirus. In that case the court took account of the benefit to creditors of a potential sale and that rents due could form part of a negotiation around this.
Where landlords agree concessions with tenants, whether by way of deferral or reduction of rent payments, they should ensure that any side letter recording such arrangements makes provision for those arrangements to automatically terminate wherever a proposal for a creditors voluntary arrangement (CVA) is submitted to creditors of any tenant company to vote on. This will mean that in any vote on the CVA proposals the landlord’s voting rights will be by reference to the full rent and other sums due under the lease.