COVID-19 Update: Options for Non-Payment of Rent for Commercial Landlords

Overview


Failure by tenants to pay rent due under commercial leases is becoming a common occurrence in the Coronavirus (COVID-19) world. Unsurprisingly, rent collection difficulties are having far-reaching consequences on the property industry, particularly in relation to commercial property landlords and their financiers.

In response to the current economic climate, and in advance of the June quarter day, the UK Government recently announced new measures to protect commercial tenants, including an extension of the temporary ban on landlords forfeiting leases for non-payment of rent. The initial ban (set out under the Coronavirus Act 2020) was due to expire on 30 June 2020, but has now been extended until 30 September 2020.

In light of the temporary curtailments of well-trodden remedies which were previously available to landlords faced with rental arrears, we have produced a user-friendly table below which summarises the current position on these options. The options referred to in the table are by no means exhaustive and should of course be considered in the context of the terms of the relevant lease. In these unprecedented times, we recommend that both landlords and tenants review their lease documentation to ensure that all options, remedies and reliefs are sufficiently explored.

The latest announcement in relation to the extension of protection measures for tenants follows the publication of a new voluntary Code of Practice for Landlords and Tenants. We have highlighted further key details on the Code below. Importantly, the Code confirms that tenants will remain liable for rent and service charge payments (subject to any contrary agreement being reached) – landlords and tenants need to be aware that, notwithstanding recent legislative changes, rent and other sums of money will continue to accrue during this “holding period”.

Whether you are a landlord, tenant or financier, please feel free to contact the McDermott real estate team for advice and guidance on your next steps.

In Depth


OPTION

SUMMARY

COVID-19 LIMITATIONS

Forfeiture

This remedy allows a landlord to end a lease before the expiry date. Landlords will “re-enter” the premises and take possession of the premises – effectively terminating the lease. This can occur peaceably (for example, by changing the locks) or through court action.  

Landlords were initially prohibited from forfeiting a lease for non-payment of rent (or other sums, including service charges and insurance rent) until 30 June 2020. This period is now extended until 30 September 2020, providing business tenants with an additional three-month window. The extension of this moratorium on forfeiture will come into force on 29 June 2020.

Some landlords have been exploring the possibility of forfeiting leases for reasons other than for non-payment of rent, e.g., for a business tenant’s insolvency. This may be a viable option because it does not fall within the suspension provisions, but will bring additional complexities (see the insolvency provisions below).

In March 2020, the Government confirmed that correspondence between a landlord and tenant during the moratorium would not amount to waiving the right to forfeit (this provision expires on 30 June 2020). Landlords should be careful not to waive any such right if they enter into discussions with tenants going forward.    

Debt Proceedings

Landlords can issue debt proceedings in court to recover unpaid rent.

There is currently no curtailment on a landlord’s ability to issue debt proceedings.

However, landlords should remain alert to the financial and reputational costs of issuing debt proceedings in these unprecedented times. In addition, given the backlog of cases with HM Courts & Tribunals Service, it would likely take several months for any debt claim to be satisfied.

Commercial Rent Arrears Recovery (CRAR)

Landlords can instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to any rental arrear.

Landlords can only pursue CRAR if a tenant has at least 90 days’ net unpaid rent outstanding until 30 June 2020. 

The UK Government has announced that from 30 June 2020, landlords will only be able to use CRAR if a tenant has at least 189 days’ net unpaid rent outstanding. This requirement will expire on 30 September 2020. We await review of the final legislation to confirm the position.

Statutory Demands

Landlords can issue a written/statutory demand for payment of a debt. A statutory demand that has not been satisfied within 21 days can be used by a landlord to trigger insolvency of the tenant entity (assuming the sum or sums demanded exceed £750).

Landlords are unable to issue statutory demands between 1 March 2020 and 30 June 2020 (or one month after the Corporate Insolvency and Governance Bill comes into force, if later) if the demand forms the basis of a winding-up petition presented at any point after 27 April 2020.

These proposals form part of the Corporate Insolvency and Governance Bill, which is currently progressing through Parliament but at the time of writing has yet to receive Royal Assent).

An amendment that extends the temporary ban until 30 September 2020 has been tabled. This amendment is expected to appear in the next iteration of the Bill.

Statutory demands that do not form the basis of a winding-up petition can still be served. However, a statutory demand without the threat of a winding-up petition will be of limited use to a landlord. 

Winding-Up Petitions

Landlords can issue a winding-up petition to place a tenant entity into compulsory liquidation because the tenant is unable to pay its debts.

Landlords are unable to present a winding-up petition between 27 April 2020 and 30 June 2020 (or one month after the Bill comes into force, if later) unless they have a reasonable belief that one of the following is true:

·         COVID-19 has not had a financial effect on the debtor.

·         The debtor would have been unable to pay its debts even if COVID-19 had not had a financial effect on the debtor.

“Financial effect” means the debtor’s financial position worsened in consequence of, or for reasons relating to, COVID-19.

The proposals similarly form part of the Corporate Insolvency and Governance Bill.

An amendment that extends the temporary ban until 30 September 2020 has been tabled. This amendment is expected to appear in the next iteration of the Bill.

These measures will likely prevent almost any debt-based winding-up petition from being presented.

Administration Orders

Landlords can file an Administration Order to appoint an administrator to pursue a tenant for unpaid rent.

Unlike the other insolvency procedures, there is no limitation of a landlord’s ability to appoint an administrator. However, due to the cost of the procedure, landlords are unlikely to pursue this option.

Security Enforcement

Landlords can enforce any available security to recover the cost of any outstanding sums, i.e., a bank guarantee, a surety, a former tenant, a rent deposit or an authorised guarantee agreement.

There is currently no curtailment of a landlord’s ability to enforce these forms of available security. Prior to any enforcement, a landlord should review the security documents to ensure that any such right is correctly exercised.

New Code of Practice for Landlords and Tenants

On 19 June 2020, the UK Government published a new voluntary Code of Practice for Landlords and Tenants (“The Code”), encouraging landlords to engage in fair and transparent discussions with tenants over rental payments. The Code applies to all commercial tenancies, although it is expected to be of greater significance for landlords and tenants operating in the retail and hospitality/leisure sectors.

The Code will apply until 24 June 2021. A copy of the Code can be accessed here.

Key points to note include the following:

1. Rent Arrears

The Code confirms that tenants will remain liable for rent arrears, subject to a contrary agreement being reached with their landlords. Tenants that struggle to pay rent when it falls due should seek to enter into a rent payment plan, seek rent deferrals, or ask a landlord to waive contractual default interest on unpaid sums. Where reasonable, landlords should provide such concessions while taking into account their own duties and financial commitments.

Notably, where tenants have received funds and savings from government support schemes, these should be used to pay rents as well as other financial liabilities.

2. Service Charges

Service and insurance charges should continue to be paid in full (subject to any contrary agreement with the landlord). However, where practicable, e.g., in cases where the lack of full use of the property means running costs are lower than forecasted, charges should be reduced where appropriate.

3. Impact on Banking Covenants and Financiers

Where a landlord’s commercial property is subject to a mortgage, a landlord will owe obligations to the bank. These obligations will typically extend to ensuring the protection of any rental income stream relating to the property. Importantly, the Code and the COVID-19-related legislation do not suspend any obligations owed by a landlord to its lender. However, as the financial sector is encouraged to assist businesses during the current crisis (with UK Finance stating its commitment to showing flexibility to commercial borrowers), it is generally considered that lenders may (or should) be more sympathetic in their dealings with borrowers in circumstances where the borrower is in breach of its financial covenants under their facility agreement due to legislative changes and/or COVID-19-related circumstances.

As a practical measure, it is recommended that landlords are proactive in terms of initiating a dialogue with their lender about any actual or likely future breach of their financial covenants. The decision will, of course, rest with the lender in terms of whether they are prepared to waive any breach but early communication is paramount to ensure productive discussions and preserve the relationship between the parties.

4. Status

The Code is voluntary and therefore places no legal obligation on landlords at this time. The Code does not undermine or alter the basis of the legal relationship or existing lease contracts, or override arrangements that have already been put in place. Nonetheless, the Code confirms the legal position that tenants are still required to pay their rent in full, with any variation in payment terms only becoming effective on agreement with their landlord.

This article was authored with contribution from Ryan Clarke, Trainee