Lease arrears: options for landlords in England and Wales

Out-Law Guide | 29 Sep 2020 | 11:13 am | 8 min. read

Commercial landlords in England and Wales must consider their approach to the increasing level of arrears given further extensions to restrictions on remedies.

Restrictions on forfeiture for arrears and on Commercial Rent Arrears Recovery (CRAR) which were due to end on 30 September have now been extended to 31 December 2020 for all commercial leases. Restrictions on statutory demands and winding-up tenants have also been similarly extended.

Landlords now face potential arrears for the March, June and September quarters until 31 December 2020, as well as potential arrears for the December quarter from 25 December. Where there is no prospect of recovery from a third party and no sufficient rent deposit to recover the arrears, landlords are likely to want to look longer and harder at the options available to them.

Recovery from third parties, such as former tenants or guarantors; recovery via rent deposits; debt proceedings against a tenant; forfeiture for non-arrears related breaches; and winding-up in certain limited circumstances, remain available to landlords in appropriate cases. See our Out-Law guide to rent recovery and protection - what commercial landlords can do.

Concessions

The evidence is that many landlords have reached arrangements with tenants for deferred rent payments and other concessions. The Code of Practice for Landlords and Tenants of Commercial Property is expected to remain in place until June 2021. Although not mandatory, the code is a useful addition to the landlord's arguments as it requires transparency from tenants on their financial position as part of any request for a concession for the landlord. This should be useful in flushing out 'can pay, won't pay' tenants.

Landlords now face potential arrears for the March, June and September quarters until 31 December 2020, as well as potential arrears for the December quarter from 25 December. They are likely to want to look longer and harder at the options available to them.

Where a tenant refuses to provide the information required by the Code of Practice, and the landlord then pursues debt proceedings, the tenant's conduct might be a factor in a costs order on a more draconian basis than would usually be the case. However, we have no evidence yet of how courts will view non-compliance with the Code.

Debt proceedings

Landlords may increasingly turn to debt proceedings. The reputational damage of such proceedings may be enough to encourage payment from high profile 'can pay, won't pay' tenants. In addition, the tenant will be liable for the successful landlord's costs, and it is clear that interest will be claimed on the arrears.

If the relevant lease contains an effective anti set-off provision, the tenant's defences to any claim for fixed sums such as rent, insurance premium contributions or service charge payments on account are likely to be spurious and ultimately unsuccessful. Although these claims may delay the proceedings, they will also increase the costs of the proceedings that the tenant is likely to have to pay.

The following points are worth noting in the context of debt proceedings.

Pre-proceedings

Proceedings must be preceded by a letter before action at least 14 days before proceedings are issued. Where the tenant is an individual, a particular pre-action protocol applies which will take a longer period to comply with before proceedings can be issued. This is outside the scope of this article, but should be complied with in all cases where the tenant is an individual.

The letter before action is a useful opportunity to make clear to the tenant the consequences of  non-payment: interest on arrears, liability for the cost of proceedings and the prospect of enforcement of any judgment debt in the ways most likely to be of concern to tenants. This may be the point at which a 'can pay, won't pay' tenant decides to pay.

If the tenant genuinely can't pay, and the landlord is not aware of any alternative enforcement methods which might yield results, then the landlord should consider whether the cost of pursuing proceedings is appropriate. There may be a number of factors to consider here, for example reputational concerns.

Default judgment

If the tenant takes no action to defend the proceedings, the landlord will be able to apply for default judgment. This should be achievable within about six weeks of issue and service of the debt proceedings, depending on court turnaround times. Late defences by tenants are usually taken account of by courts and will prevent a default judgment.

A tenant may seek to set a default judgment aside and defend the proceedings, or seek a stay of execution.

Summary judgment

A tenant must serve a defence to proceedings within 28 days, subject to any extensions of time they successfully seek.

If the defence is judged to be without merit, the landlord can apply for summary judgment. This will require a court hearing at which the landlord will need to successfully demonstrate that the defence has no real prospect of success. Summary judgment can also be applied for before the 28 day limit has expired if no successful grounds of defence are anticipated.

A summary judgment can be appealed. However, good grounds would be needed for this. Unlike a default judgment, a summary judgment is not subject to applications to set it aside although stays of execution may still be sought.

An application for summary judgment can be expensive in terms of costs, depending on the nature of any grounds on which the tenant defends the claim. It is also subject to a fixed costs regime, which might limit recoverable costs under costs orders. However, the court has discretion to make a different costs order, and may do so where the issues have been complex or the tenant's conduct has been reprehensible.

Where the court thinks it possible, but improbable, that a tenant's defence might succeed, then it can make a conditional order under which the case can continue but only if the tenant complies with conditions ordered by the court. In this scenario, a likely condition is that all or part of the arrears is paid into court. The landlord becomes a secured creditor for this sum.

Generally, it will take between three and six months from issue of the proceedings to achieve summary judgment, depending on court availability.

Enforcement methods

Having obtained judgment, if the tenant does not pay the judgment debt, the landlord should seek to learn as much about the tenant's financial position as possible to the extent it has not already done so. This will enable the landlord to best direct its enforcement efforts.

All of the principal methods of enforcement will require further applications to the court once judgment has been obtained. Generally, only 'fixed costs' from the cost of making these applications are recoverable, although a landlord can seek an order for additional costs incurred if the tenant resists enforcement. Tenants will be able to make applications for stays of the enforcement proceedings.

In the current climate, various creditors may be bringing proceedings against tenants, and a search of the Register of Judgments, Orders and Fines will provide details of these. Clearly, the earlier the creditor pursues enforcement the more likely it is to be successful.

Taking control of the debtor's goods

This can be a particularly effective remedy where the tenant is dependent on the goods to run its business - which is the case in most commercial arrears recovery situations.

If the application is successful, then the court will issue a warrant or writ of control, depending on whether the case is in the County Court or High Court. This gives certified enforcement agents the right to attend the debtor's premises and take control of goods there for the purpose of selling them and using the proceeds to discharge the debt. Although somewhat more circuitous and expensive, securing a judgment debt and using this method of enforcement will ultimately achieve the same result as CRAR while it remains unavailable.

A debtor can apply for a stay.

Charging order over debtor's land or securities

"Securities" for these purposes will include government stocks; shares or stocks of any other entity, with some exceptions; or units of a unit trust.

The process involves obtaining an interim charging order to protect the landlord's interest in the event of any sale of the relevant assets, and then a final charging order. Once the final charging order is obtained, the landlord can then seek an order for the sale of the property with the proceeds being used to discharge the debt.

Third party debt orders

Where the tenant is owed money by a third party, the landlord can seek an order that the third party pays the money to the landlord.

The most obvious use of such orders is against a tenant's bank account. However, they can extend more widely than this and if the landlord is aware, or can ascertain via consideration of the tenant's accounts, that other parties owe money to the tenant, a third party debt order can be sought against them.

Less used methods of enforcement

The court has the power to appoint a receiver over an income producing asset of the tenant. The receiver will manage that asset and use the income to pay the judgment debt. An order for the appointment of a receiver can be expensive to obtain and run, and will only be ordered where other methods of enforcement are not available.

Non-party costs orders

The court has the power to make an order for costs against the ultimate beneficial owner of the tenant – effectively 'piercing the corporate veil'. This is only available in exceptional cases, and generally only where it can be shown that the non-party controlled the tenant, funded the litigation or stood to benefit from the litigation.

There have been cases where such orders have been made against sole or controlling directors or majority shareholders of a party to litigation, and the threat of seeking such an order in appropriate circumstances can be useful.

Tenant insolvency

If the tenant enters an insolvency process before or during any debt proceedings, this may affect the proceedings.

Landlords may want to consider whether the proceedings themselves may push a genuinely distressed tenant into an insolvency process.

The impact of insolvency on the commencement or continuance of court proceedings will depend on the nature of the insolvency proceedings, as follows:

  • administration – the statutory moratorium which applies on administration will prevent commencement or continuance of proceedings without the consent of the administrator or the leave of the court;
  • compulsory liquidation – once a winding-up order is made, the court's permission is required to commence or continue proceedings;
  • creditors' voluntary liquidation (CVL) – there is no moratorium preventing the commencement or continuance of proceedings but the tenant's entry into CVL means it is likely to have limited financial means to satisfy any judgment obtained against it.
  • company voluntary arrangement (CVA) – there is no moratorium preventing the commencement or continuance of proceedings in these cases. This may encourage debtors to go into administration with a view to exiting the administration via a CVA, or alternatively to obtain a moratorium under CIGA (below) while the CVA proposal is considered;
  • moratorium under the 2020 Corporate Insolvency and Governance Act (CIGA) – this new form of insolvency process allows directors to trigger a moratorium period for up to 40 business days on confirming the company is or is likely to become unable to pay its debts within the moratorium period, and that the moratorium will result in the rescue of the company as a going concern. During this period, proceedings cannot be commenced or continued without the permission of the court;
  • restructuring plan under CIGA – previous rights may be extinguished by a restructuring plan, limiting the landlord's remedies to the quantum of any compromised amount of its claim.