Out-Law Guide | 28 Mar 2022 | 4:16 pm | 17 min. read
Significant and wide-ranging restrictions placed on landlords' ability to recover rent arrears from business tenants have now lapsed or will shortly do so.
Almost all the restrictions introduced in March 2020 lapsed on 25 March 2022, with the remaining restrictions, which prohibit the service of statutory demands and the presentation of winding-up petitions generally, due to lapse on 31 March 2022.
The previous measures are replaced by new restrictions contained in the Commercial Rent (Coronavirus) Act 2022, which came into force on 24 March 2022. Landlords will now be entitled to exercise the same remedies for non-payment of rent as they did prior to the restrictions coming into force except that any arrears which arose during what the Act refers to as the “protected period” – protected rent debt – will now be capable of being referred to arbitration by either the landlord or the tenant, and the usual remedies for non-payment of rent will not be available to landlords in relation to those protected rent debts.
This guide addresses the position in England.
The Act makes provision for enabling relief from payment of protected rent debts under business tenancies adversely affected by coronavirus to be available through arbitration. Protected rent debts include rent, service charge, insurance rent, interest and any VAT. The Act establishes a binding arbitration scheme to resolve disputes between landlords and tenants relating to protected rent debt; the arbitrator will consider the circumstances of both the landlord and the tenant in the context of the pandemic when making their award.
The “protected period” runs from 21 March 2020 to 18 July 2021, or earlier depending on when the closure requirements or specific coronavirus restrictions for any particular business expired. This means that the protected period will vary from business to business. For businesses such as pharmacies, supermarkets and post offices, which were never required to close, there will be no protected period, and therefore the operators of those businesses will have no protected rent debt.
The arbitrators will have a wide discretion to determine disputes based on the evidence adduced by both parties. The arbitrator can award relief from payment. This can include writing off all or part of the outstanding sums; giving further time to pay in instalments, albeit for a period of not more than 24 months; or reducing interest payable under the terms of the lease.
The aim of the award is to preserve and restore the tenant’s business so far as that is consistent with preserving the landlord’s solvency. However, it also appears to be the case that if the tenant can pay the arrears – for example, if it is well-capitalised – then the tenant should be ordered to do so in full and without delay.
The effect of the Act is that any claims for rents from a protected period will be ringfenced and the claim will be determined by arbitration, rather than court proceedings or private arbitration proceedings – other than those provided for in the new legislation. If a landlord issues proceedings to recover protected rent debts, or if a landlord has issued proceedings after 10 November 2021, then either party can apply for a stay of the proceedings and the court must order that stay.
The arbitration can be dealt with either on paper or, where one or both parties makes a request, at an oral hearing, which must be held in public, unless the parties agree otherwise.
Landlords will not able to exercise their various other remedies in respect of protected rent debts until either the conclusion of the arbitration, or, if no reference to arbitration is made, until 25 September 2022. Those remedies include:
BEIS and DLUHC will issue further guidance to landlords and tenants, as well as to arbitrators, on how the arbitration process will work for all parties in due course.
The ‘Code of Practice for commercial property relationships following the COVID-19 pandemic’, introduced in November 2021 and drafted against the backdrop of the Commercial Rent (Coronavirus) Bill as it then was, contains details of the behaviours which landlords and tenants are expected to exhibit. It will continue to apply.
The previous restrictions on the traditional remedies available to landlords for non-payment of rents, such as forfeiture and exercising CRAR, have now lapsed.
The restrictions introduced by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) (No. 2) Regulations 2021, which, in effect, prohibited service of statutory demands and the presentation of winding-up petitions in all but very limited circumstances, will lapse on 31 March 2022.
Accordingly, if any arrears of rent are not now a protected rent debt under the new Act, then the provisions of the Act, including the new restrictions it contains, will not apply. In those cases, landlords can once again exercise their usual remedies, from the relevant dates, for any rents which are not protected rent debts.
A summary of some of the options available to landlords and some possible impacts of the Act on those remedies is contained below.
The restrictions on forfeiture for non-payment of rent imposed in March 2020 were onerous to commercial landlords. This is because forfeiture of leases for breach of the covenant to pay rents is one of the most powerful remedies available to a commercial landlord.
For solely commercial leasehold premises, landlords have a right to forfeit by peaceable re-entry and thus do not have to first serve a statutory notice of the breach on the tenant under section 146 of the Law of Property Act 1925. Whilst tenants will nearly always be granted relief from forfeiture by the court if they apply and pay any arrears either before the hearing of an application for relief or as a condition of the relief being granted by the court, the tenant will usually be ordered to pay the landlord’s costs of the application.
Professional advice should always be taken prior to exercising a right to forfeit as some statutory restrictions do exist. For example, a lease of both commercial and residential premises cannot be forfeited by peaceable re-entry. Advice on whether a right to forfeit has been waived should also be sought. This will be particularly important given that any right to forfeit not expressly waived prior to 25 March 2022 could now be waived by conduct.
If a right to forfeit has been waived, then the tenant could apply for a declaration that the lease has been wrongfully forfeit, usually alongside an alternative application for relief. If the court holds that the lease has been wrongfully forfeit, then the court can order the landlord to pay the tenant’s costs of the application.
Equally, professional advice will now also need to be taken to establish whether the rents for which the landlord wishes to forfeit are “protected rent debts”. Any forfeiture for protected rent debts would be ‘wrongful’ – i.e. unlawful – and could, for example, expose the landlord to costs liability in any court proceedings, and potentially also further financial liabilities insofar as the forfeiture leads to loss and damage to the tenant.
Commercial rent arrears recovery (CRAR) is the method of enforcement to recover arrears of rent which replaced and abolished the common law remedy of distress in April 2018.
CRAR allows an enforcement agent to take control of a tenant’s goods and sell them to recover arrears, but it requires notice to be given to the tenant prior to such action being taken. It also only applies to principal rent, VAT and interest, as opposed to any sums reserved as rent in a lease, and can only be exercised at commercial, as opposed to mixed-use, premises. CRAR also prescribes the method of sale of the goods seized.
For those reasons and others, CRAR is often seen as a diluted version of distress and can pose both administrative and practical challenges. This means that many landlords prefer not to exercise it, and elect, instead, to use other enforcement options open to them.
Professional advice should be taken to establish whether the arrears of rents for which the landlord wishes to exercise CRAR are “protected rent debts”.
The coronavirus restrictions imposed in March 2020, as subsequently amended, imposed 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:
Professional advice should be taken to establish whether the arrears of rents for which the landlord wishes to commence a debt claim in civil proceedings are a “protected rent debt”. If they are and a landlord issues proceedings to recover the debt, then the tenant is likely to apply for a stay of the proceedings, which the court must grant, and the landlord could be ordered to pay the tenant’s costs of the proceedings up to that point.
The restrictions introduced in response to the coronavirus pandemic in March 2020 did not prevent the recovery of rent from former tenants and their guarantors.
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'.
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.
Due to a late amendment by the House of Lords, the Commercial Rent (Coronavirus) Act 2022 means that:
The effect of those provisions is seemingly designed to prevent landlords from seeking to recover any balance, following a write off, from former tenants, former guarantors or existing guarantors.
The restrictions introduced in response to the coronavirus pandemic in March 2020 did not, on the face of it at least, prevent the recovery of rent from existing guarantors.
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.
Again, the Commercial Rent (Coronavirus) Act 2022 means that:
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 – albeit this was restricted by the CRAR Regulations 2020 until 25 March 2022.
A landlord can only serve a valid section 81 notice on the subtenant where it is entitled to exercise CRAR against its immediate tenant.
It appears that the effect of the Commercial Rent (Coronavirus) Act 2022 will be that the landlord is unlikely to be able to seek the balance of any sum which would otherwise be due under a headlease, following a reduction or write-off by an arbitrator, from a sub-tenant under section 81.
The coronavirus restrictions imposed in March 2020, as subsequently amended, did not prohibit landlords from drawing down a rent deposit for arrears of rents, albeit the government code of practice suggested that landlords should not unreasonably request top-ups and it was debateable whether the landlord could forfeit a lease for failure by the tenant to top-up.
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.
Professional advice should be taken to establish whether the arrears of rents for which the landlord wishes to draw down from a rent deposit to settle are protected rent debts. Equally, professional advice will need to be taken where a landlord has already, prior to 25 March 2022, drawn down from a rent deposit for a debt that has now become a protected rent debt as the effect of the legislative changes is that a landlord cannot require a tenant to top up a deposit in those circumstances.
The coronavirus restrictions imposed in March 2020, as subsequently amended, imposed no restrictions on the accruing of interest on unpaid sums or the landlord’s ability to recover any costs from its tenant which it was entitled to recover under the terms of the tenant’s lease.
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 to be determined by the court in any litigation between landlords and tenants. However, in practice, and where there is no litigation, these costs are often claimed as a debt by landlords – in practice, by simply adding them to a rent demand.
Professional advice should be taken to establish whether any interest arose during a ‘protected period’ as interest payable under the terms of a lease on arrears can be reduced, including to zero, as part of the relief from payment awarded by the arbitrator.
It does not appear that the Commercial Rent (Coronavirus) Act makes any provision regarding liabilities for legal costs under the terms of a commercial lease. However, the legal or other costs incurred in connection with the arbitration, including the arbitration fees, are not recoverable by virtue of any term of the lease.
The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) (No. 2) Regulations 2021, which came into force on 1 October 2021, prohibited service of statutory demands and the presentation of winding-up petitions in all but very limited circumstances. Those regulations will lapse on 31 March 2022.
The Commercial Rent (Coronavirus) Act 2022 has introduced a new prohibition on presenting a winding-up petition solely in relation to a protected rent debt, and also a prohibition on presenting a bankruptcy order petition in relation to a protected rent debt.
Professional advice should be taken to establish whether any sums due are protected rent debts as the term is used in Act.
The Act has also introduced a new moratorium where the matter of relief from payment of a protected rent debt has been referred to arbitration. That applies for the ‘relevant period’, which in this scenario would be the day beginning with the day on which an arbitrator is appointed. The end date of the period depends on what the arbitrator awards, if anything, or whether the arbitration proceedings are abandoned or withdrawn. The moratorium provides that:
For completeness, it continues to be the case that 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 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.
This is likely to be an important factor as at least some disputes regarding protected rent debts will be negotiated and settled, rather than referred to arbitration, but settlement of the protected rent debt is no guarantee of the tenant’s future solvency – particularly in the current economic climate.