Recovery of rent and forfeiture in commercial leases

It is well known that COVID-19 has had a severe impact on landlords and tenants alike, in particular with regard to commercial leases. Since the introduction of various COVID-19 related legislation, landlords have been restricted in their ability to seek enforcement of commercial leases and to recover rent. One major area of concern is what will happen to the arrears which have accrued when these restrictions are eventually lifted.

Current legislation which has been introduced includes the Coronavirus Act 2020 and the Corporate Insolvency and Governance Act 2020 (CIGA 2020), as well as additional guidance and practice directions. A voluntary Code of Practice for Landlords and Tenants of Commercial Property across the UK was published on 19 June 2020, quoting transparency and collaboration as a main focus.

On 16 June 2021 the government made an announcement regarding the current restrictions on lease enforcement and rent recovery processes, and set out the route forward for moving out of the various moratoriums which have been imposed. A prime component includes the proposed ring-fencing of arrears accrued during the pandemic, specifically the lockdown periods in which commercial tenants were forced to close their doors, and in relation to which landlords would be expected to make allowances. Landlords may find it necessary, where possible, to turn to former tenants, guarantors or sub-tenants in order to address rent arrears.

Forfeiture

The Coronavirus Act 2020 introduced a moratorium on the forfeiture of leases for unpaid commercial rent arrears from 26 March 2020. This has since been extended to 25 March 2022 (and 30 September 2021 in Wales). The suspension of such relief prevents landlords from recovering possession of their properties for arrears of rent (forfeiture following the service of a valid section 146 notice is permitted).

Only an express waiver of the right to forfeit will stop tenants being at risk of their leases being forfeited following the lifting of the restrictions should they be unable to reach an agreement as to rent arrears payment with their landlords. Interest will also have accrued on top of the rent arrears in line with any such terms of the lease.

With regards to potential ring-fencing of rent arrears accrued during lockdown, it is not yet clear how this procedure will function. Questions remain as to the interpretation of what constitutes rent accrued during lockdown or as a result of the pandemic and, of these, which will be the subject of any such ring-fencing.

Statutory demands and Winding Up

Pursuant to CIGA 2020, landlords have similarly been restricted from issuing statutory demands for unpaid rent and from seeking to wind up tenant companies which are unable to pay due to COVID-19. This restriction has been further extended to 30 September 2021. Winding up petitions shall not be presented on the basis of statutory demands issued between 1 March 2020 and 30 September 2021, and cannot be presented at all between 27 April 2020 and 30 September 2021. The rare exception being if it can be shown the debtor’s position has not been worsened by COVID-19.

Issuing after the restriction is lifted will likely defeat the defence of a company being unable to pay their debts as a result of COVID-19, especially if the debt is accrued before COVID-19 or remains after the lifting of lockdown restrictions for that company's industry. Winding up petitions will proceed on a case by case basis and it remains to be seen whether there will be further extensions to this restriction.

It should be noted that landlords will likely be an unsecured creditor in these circumstances and additional creditors may also join any such action. There is a risk, therefore, that landlords could be left without payment even after presenting a petition for winding up.

Commercial Rent Arrears Recovery (CRAR)

The restriction on the use of the Commercial Rent Arrears Recovery (CRAR) procedure has been extended to 25 March 2022 (and 30 September 2021 in Wales) in the same vein as lease forfeiture.

Even when the relief comes back into full force, there is a suggestion from the government that 554 days of accrued outstanding rent will continue to be the requirement before this right can be exercised. It may be increased further to include the period up to 25 March 2022. This may prove to be a significant barrier to landlords wishing to utilise the procedure; tenants may be able to work this to their advantage.

Debt proceedings

There are currently no restrictions on landlords being able to issue proceedings in the courts in order to recover arrears, although this is might be seen as throwing good money after bad if the tenants have no assets. It is important to consider the solvency of a commercial tenant before pursuing them in this way. As always, litigation is seen as a last resort, but sometimes a necessary tool to get tenants to engage.

There have been several cases which have made their way through the courts already. These provide that landlords will not be prevented from recovering rent and service charge arrears which have accrued as a result of the pandemic.

Rent relief packages

Negotiations have already been utilised as a tool since the beginning of the pandemic. This measure allows landlords to retain tenants who are paying rent, at least in part, and increases the chances of their commercial tenants being able to recover and continue to pay rent and reduce arrears in the future.

The government announcement on 16 June 2021 included the proposed introduction of an obligatory negotiation of rent relief packages between landlords and tenants. Should negotiations fail, the parties will then be obliged to arbitrate and obtain a binding decision. Arbitrators will have wide-ranging powers to vary lease terms including the ability to waive a proportion of rent or service charge arrears, to allow additional time for payment of any such arrears and to extend or reduce the lease term, for example.

It is as yet unknown as to whether this procedure will relate to all commercial leases and the extent of the rent arrears it will cover, i.e. rent arrears accrued throughout the pandemic or only those accrued during specific lockdowns. It is also unclear whether it will relate to the entire sum of arrears or whether agreements regarding only a proportion of them will allow parties to avoid this procedure. Once in force, it is likely we will see a significant spike in the demand for arbitrators and their services, which could in itself cause an issue and lead to a bottleneck of dealing with such matters.

Future developments

In light of the government’s announcement, it is clear further legislation will be introduced in order to deal with the lifting of the restrictions which have been placed on landlords and their ability to enforce leases and recover rent. The proposals which have been announced to date will need clarification for both landlords and tenants to understand their rights and obligations in order to comply with the new procedures. In particular, there are many questions which remain with regards to the ring-fencing of rent arrears and obligations on landlords and tenants to negotiate and arbitrate. There has been some suggestion that the new legislation will be more protective of landlords.

In the meantime, it remains a possibility that the restrictions on lease forfeiture, CRAR and statutory demands and winding up petitions could be extended further. This is certainly a risk in relation to statutory demands as the restrictions are due to end earlier than those imposed for forfeiture and CRAR.

Don’t forget the Government is (at the same time) reviewing forfeiture and it is likely the procedure will be completely overhauled – watch this space.

If you have any queries, please contact anyone in our Property Litigation team for assistance.