Comment by Ben Gildea Associate in the Real Estate Disputes Team at Irwin Mitchell
The government announced yesterday that it is extending the current restriction which prevents landlords from evicting commercial tenants until the end of the year. It is also extending the restrictions on use of Commercial Rent Arrears Recovery (“CRAR”), the process of seizing control of tenant’s goods and selling them to recover arrears, until the end of the year.
The Secretary of State for Housing said that the government was taking this step to “stop businesses going under and protect jobs over the coming months”. Although this eagerly anticipated decision from the government will be a welcome relief to many businesses who continue to struggle from the effects of the enduring pandemic, it will serve as a blow to many landlords who are struggling to recover potentially significant rent arrears due to the current restrictions imposed by the government.
Under the Coronavirus Act 2020, landlords are unable to:
• Take steps to forfeit a business tenancy by peaceable re-entry on grounds of non-payment of rent or other sums due under the lease before expiry of the relevant period; or
• Where forfeiture proceedings have been issued at court, to obtain a date for possession of commercial premises before expiry of the relevant period.
The “Relevant Period” was defined by the Act as being 30 September 2020 but this will now be taken as a date to be confirmed at the end of December this year.
The above measures will undoubtedly prevent unscrupulous landlords from taking advantage and offer a crucial lifeline to many businesses, particularly those on the high street who struggled with a forced closure and complete loss of revenue in the height of the lockdown. However there has been some arguably unintended consequences too. Landlords are finding that some tenants are refusing to pay rent even in circumstances where the tenants are well capitalised and have continued to trade from their premises. Many have also refused to engage with landlords altogether by seeking to negotiate a fair compromise or suitable rent deferment. Others have reneged or defaulted on such agreements leaving landlords with limited ability to enforce them.
In the usual course of events and prior to the Coronavirus Act 2020, a landlord faced with the above scenario would be entitled to secure possession of its premises by peaceably re-entering and changing the locks thus minimising the risk of further rental voids, with the tenant potentially being able to reinstate the lease if it pays off the arrears in full, as well as the landlord’s costs of enforcement. However, as it currently stands, landlords have fairly limited enforcement options meaning that the balance of power is overwhelmingly in favour of tenants.
For certain landlords such as smaller pension funds or investment landlords with their own financial commitments, yesterday’s announcement could be disastrous news and potentially mean that existing rental voids are prolonged even further. As reported by the BBC reported, this could have an impact on pensions and savings, and could even result in banks becoming less willing to lend.
As to any counter measures to assist landlords directly, the Government appear to be hoping that parties adhere to the voluntary Code of Conduct.
In considering how to proceed in light of yesterday’s decision, landlords and tenants should bear in mind some of the following key points:
1. The government has repeatedly emphasised that landlords and tenants should be working together to agree rent payment options if businesses are genuinely struggling;
2. In June, the government published a voluntary Code of Practice to support and underpin the above discussions. The Code seeks to embed good practice between both sides and encourages them to work together in rent negotiations.
3. There is no indication as yet on whether the restrictions on winding up petitions will be lifted or extended beyond 30 September 2020. Under the Coronavirus Insolvency and Governance Act 2020, a winding up petition cannot be issued in respect of a statutory demand served after 1 March 2020 unless the creditor can show (a) the Coronavirus has not had a financial effect on the debtor or (b) the debtor would not have been able to pay its debts irrespective of the Coronavirus. This measure, which was intended to prevent aggressive debt collection tactics, has imposed a high threshold for landlords to overcome.
4. Until yesterday’s announcement, a landlord could only exercise CRAR where the net unpaid rent was equivalent to 189 days rent – that’s now set to be extended to at least 279 days meaning that CRAR continues to be an option only where the tenant was in arrears when the March quarter fell due.
5. Landlords still have the option to pursue an arrears claim through the courts but for many landlords this will be considered a timely and costly option and without the ability to commence winding up proceedings should the tenant fail to satisfy any judgment, the option may also lack any real teeth.
6. The measures have expressly not waived the obligation to pay rent, but merely restrict the landlord’s enforcement options. Particularly for those tenants that are well-capitalised and have refused to engage or agree a suitable deferment plan could well find they have a huge rental bill to pay, or face eviction when the current measures come to an end.
This article first appeared in CoStar on 17 September 2020.