Out-Law Guide | 01 Nov 2021 | 11:45 am | 16 min. read
Nonetheless, landlords in England and Wales retain some scope to recover rent and other sums due to them under commercial leases, despite the statutory and other restrictions imposed in the wake of the Covid-19 pandemic. The options open to landlords in Scotland and Northern Ireland are different from those in England and Wales and are addressed in separate guides.
Depending on the specific circumstances which landlords find themselves in, remaining possible options might include, without limitation, recovering sums owed by tenants of commercial property from former tenants, guarantors, subtenants, or by claims in the county courts or High Court.
On 9 November 2021, the government published an updated code of practice for landlords and tenants of commercial property. The code is currently voluntary, but is based on measures that will be given statutory force under the Commercial Rent (Coronavirus) Bill (the Bill), which was introduced to parliament on the same day. The Bill also contains provisions to ring-fence arrears of rents for periods where the tenant had to remain closed, and to introduce a binding arbitration scheme of last resort for commercial landlords and tenants in England and Wales who are unable to come to agreement on those arrears.
The code replaces a previous code of practice which was issued in June 2020. It is based on the principle of landlords and tenants negotiating how they can share the cost of pandemic-related commercial rent arrears, where tenants are unable to pay in full. Tenants able to meet their obligations under the lease should pay in full. However, those unable to do so are expected to negotiate with their landlord “in the expectation” that the landlord waives some or all of the debt if it can.
The restrictions imposed during the Covid-19 crisis on landlords' usual remedies for recovering sums due under commercial leases from tenants include:
Practice Direction 55C, as amended, following the further extension, provides for the resumption of possession proceedings now that the stay has expired. If a landlord has a claim which was issued before 3 August 2020, the landlord must serve a 'reactivation notice' in order for the stayed claim to be listed or re-listed. If there is already a trial date, the landlord must serve the reactivation notice no later than 42 days before the scheduled hearing date, otherwise the trial will be vacated. There is no standard form for a reactivation notice, but it must be in writing and contain certain prescribed information. If no reactivation notice had been served by 30 April 2021, the claim was automatically stayed.
The Practice Direction also provides that the usual provision that the initial hearing in a possession claim should be within eight weeks of issue of the claim will not apply for the period from 20 September 2020 until 30 November 2021, which suggests that there will be some delay in progressing such proceedings whilst the courts continue deal with the backlog of stayed claims. Reference should be made to the detailed provisions of the practice direction where proceedings are being reactivated.
The term “relevant business tenancies” means the vast majority of commercial leases, whether protected by or contracted out of the Landlord and Tenant Act 1954. Excluded debt refers to debt “which is unpaid by reason of a financial effect of coronavirus”. There is, in effect, a blanket ban on presenting winding-up petitions on the grounds of inability to pay excluded debt, whether due to an unsatisfied statutory demand or otherwise, and there are additional criteria in relation to an inability to pay other debt. These new restrictions apply until 31 March 2022, albeit the Secretary of State will seemingly not be able to extend them under section 41 of the Corporate Governance and Insolvency Act 2020.
Despite these statutory restrictions, a range of options remain open to landlords in respect of debts other than ringfenced rent arrears under the Bill.
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 a party which it would be prepared to have as a tenant under an overriding lease.
The 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.
CRAR allows landlords, upon giving advance notice, to seize a tenant's or subtenant's goods from the demised premises to recover unpaid rent.
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 2020) initially prevented landlords from using CRAR unless an amount equal to at least 90 days’ rent was overdue. Iit had previously been seven days or more. This amount has been increased several times, and reached 554 days' rent as of 24 June 2021.
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, on 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 CRAR Regulations 2020.
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 noted above, the CRAR Regulations 2020 prevent landlords from using CRAR unless an amount equal to at least 554 days' rent is in arrears. This means that to serve notice on a subtenant during the usual September quarter – 29 September 2021 to 24 December 2021 – the superior landlord’s immediate tenant must be in arrears of at least 554 days’ rent. That is seemingly the case even if the superior landlord has no intention of exercising CRAR against its immediate tenant.
There are no coronavirus-related restrictions on drawing down arrears of rents from a rent deposit.
However, the government code of practice acknowledges that whilst landlords can draw on rent deposits, such draw down should be on the understanding that the tenant will be required to top up the deposit before it is "realistic and reasonable" to do so.
Whether a landlord is able to draw down on the deposit will depend on various factors, including the terms of the deed governing the deposit and how the deposit is held. If the tenant has entered an insolvency procedure, then there may be restrictions on drawing down on any deposit, albeit a well-drafted rent deposit deed will circumvent such restrictions by giving the landlord control of the deposit, thus making 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 draw down, where they have the right to do, in advance of the tenant entering the insolvency procedure so as to avoid any risk that they will be unable to do so if the tenant does enter a 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 – i.e. a priority debt in the administration – the administrator will not be subject to any obligation under the deposit deed to 'top up' the deposit following a withdrawal. In that situation, careful thought will need to be given as to whether it would be preferable 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 arrears of 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 tool in a landlord's suite of remedies, particularly in the absence of the right to forfeit due to statutory restrictions, for three main reasons:
In April 2021, various decisions in the High Court confirmed that landlords are, in most circumstances, entitled to recover rent and service charges owed to them by tenants whose premises have been closed as a result of coronavirus restrictions. It appears, strictly speaking at least, that will remain the position until the new legislative scheme, whereby arrears of rents for periods where the tenant has had to remain closed during Covid-19 are ring-fenced and made subject to a process of binding arbitration if agreement between landlords and tenants cannot be reached, comes into force.
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 been extended several times and as matters stand is now due to expire on 25 March 2022. This is now the same in Wales and Northern Ireland. 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. 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 this suspension only applies to forfeiture for the breach of a tenant covenant to pay rents, a landlord can still forfeit a lease for any other breaches of covenant not relating to payment of rents.
Where landlords can forfeit commercial leases, with no residential elements, for non-payment of rents by peaceably re-entering the premises, in the case of any of breaches of tenant covenant the landlord must first serve a notice on the tenant under section 146 of the Law of Property Act 1925. That notice must give the tenant a reasonable amount of time to remedy the breach, if it is capable of remedy, and it is only after that reasonable period of time elapses that a landlord is entitled to forfeit the lease. A landlord can do so by peaceable entry, where lawful and practicable, or by issuing possession proceedings at court. The tenant may apply to the court for relief from forfeiture and/or a declaration that the lease has been wrongfully forfeited in either event.
In the current climate, landlords should consider the risk of a possible void, and, in particular, its rates liability during that void in deciding whether forfeiture is a desirable and/or practicable option.
Following the implementation of legislation by which arrears of rents for periods where the tenant has been compelled by law to remain closed during Covid-19 are ring-fenced and made subject to a binding arbitration scheme, it is expected that that restrictions on forfeiture will then only apply to ringfenced arrears. If that is the case, then landlords should be able to forfeit leases where the tenant has arrears of rents which accrued prior to March 2020, or arrears which accrued after Covid-19 restrictions ceased to apply in the relevant tenant’s sector.
Although landlords are not able to forfeit a lease on the grounds of non-payment of rent during the period of suspension, tenants still remain liable for rent during that period. Most standard commercial 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, many commercial leases provide that the tenant will be liable for the landlord’s costs of or in contemplation of notices served under section 146 of the LPA 1925, and also often for costs of or occasioned by any breach of tenant covenant. Those provisions do not affect the court’s ultimate discretion to award costs in the event that such costs fall be determined by the court in any litigation between landlords and tenants.
Statutory demands can still be served; however, a winding-up petition cannot now be presented for failure to make payment of “excluded debt” due under a “relevant business tenancy”.
Excluded debt refers to debt “which is unpaid by reason of a financial effect of coronavirus” and relevant business tenancies will comprise most commercial leases.
There is effectively a blanket ban on winding up petitions on the grounds of inability to pay excluded debt, whether due to an unsatisfied statutory demand or otherwise, and there are extra criteria for inability to pay other debt. These new restrictions apply until 31 March 2022 and the Secretary of State will seemingly not be able to extend them under section 41 of the Corporate Governance and Insolvency Act 2020 (the CIG Act).
Previously, under the CIG Act, it was possible to present winding-up petitions if the creditor was 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.
However, that position appears to have been altered by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) (No. 2) Regulations 2021, which came into force on 1 October 2021.
That said, the new provisions do provide that “excluded debt” refers to debt “which is unpaid by reason of a financial effect of coronavirus”, thus maintaining the spirit of the previous provisions contained in the CIG Act. Nonetheless, actually proving that financial difficulties are unrelated to coronavirus will continue to pose a significant evidential burden to landlords, or any creditors, seeking to present winding-up petitions. As such, in practice it appears that except in unusual circumstances it may only be possible to present winding-up petition for debts which pre-dated the coronavirus crisis, and where it can be shown, clearly, that the tenant company was unable to pay its debts regardless of any financial impact of coronavirus.
Where tenants have entered 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. This will be 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 period that commercial premises were forced to close due to legislation preventing their being open, 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 statutory restrictions have not removed the liability to pay rent and so it continues to be due. Where premises were 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 were furloughed – which requires there to be an intention to re-hire them – then it is possible, but by no means likely, that rents would have continued to be an expense of any administration of the tenant at that time.
Where landlords agree concessions with tenants, whether by way of deferral or reduction of rent payments, landlords 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.
As noted above, the government has proposed a new legislative scheme whereby rents which accrued during periods of forced closure will be ring-fenced, and, in the absence of a commercial settlement being reached by a landlord and tenant, will be capable of being referred to a binding arbitration. In other words, it appears that any such claims for rents will have to be determined by arbitration, rather than court proceedings, and that the new legislation will make provision for how arbitrators are to determine such claims.
It appears that the new legislation will ringfence rent debt accrued from March 2020 until respective sector restrictions were removed. No specific date in March 2020 has yet been given, but it would seem logical that the start date would be the same as the start date of the moratorium imposed by section 82 of the Coronavirus Act 2020: 24 March 2020.