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Commercial landlord and tenant Update - September 2020

View profile for Chloe Benson
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With the recent government announcement extending some of the restrictions on rent recovery until 31 December 2020 and with many landlords still out of pocket from March and June, it is unsurprising that many landlord and tenant relationships are under strain.

Below is a detailed update of the significant changes in regulations over the past 6 months. JUMP TO

In summary these are:

Forfeiture based upon rent arrears: the government has extended the moratorium until 31 December 2020.

Forfeiture for other breaches of the lease: the general stay on possession proceedings has now been lifted and therefore landlords are able to forfeit the lease based on other breaches provided that the lease permits this.

Commercial Rent Arrears Recovery (CRAR): New regulations are set to come into force on 29 September 2020 restricting the use of CRAR even further and increasing the minimum amount of net unpaid rent that must be outstanding before CRAR may take place. 

What about statutory demands? The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020. 

On 24 September 2020, the government announced that the restriction on statutory demands and winding up petitions would be extended to 31 December 2020 to protect companies from aggressive debt collections.

Are there any remedies which are still available?

  • Debt recovery
  • Pursuing an existing guarantor
  • Drawing down from the rent deposit
  • Pursuing a former tenant and their guarantor
  • Pursuing a subtenant

Where are we with the Code of Practice? JUMP TO 

What are the latest restrictions?

Forfeiture based upon rent arrears: the government has extended the moratorium until 31 December 2020. Realistically, if landlords are seeking forfeiture as a remedy then January 2021 is likely to be the trigger date for proceedings or for peaceably re-entry, in order to capture the December 2020 quarter’s rent.

Forfeiture for other breaches of the lease: the general stay on possession proceedings has now been lifted and therefore landlords are able to forfeit the lease based on other breaches provided that the lease permits this. This is of course subject to firstly serving notice under section 146 of the Law of Property Act 1925 and giving the tenant a reasonable period of time to remedy the breaches specified within the notice. Due to the backlog of possession claims, it is likely to take considerably longer than usual before a hearing date is fixed. Whilst landlords are still able to peaceably re-enter, this would still lead to a level of uncertainty because of a tenant’s right to apply for relief from forfeiture.

Commercial Rent Arrears Recovery (CRAR): New regulations are set to come into force on 29 September 2020 restricting the use of CRAR even further and increasing the minimum amount of net unpaid rent that must be outstanding before CRAR may take place. The restrictions are as follows: If exercised up to 28 September 2020, 189 days’ net rent must be outstanding; from 29 September 2020 until 24 December 2020 (inclusive), 276 days' net rent must be outstanding; from 25 December 2020, 366 days’ net rent must be outstanding.

What about statutory demands?

The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020. This initially prohibited the presentation of a winding-up petition (presented between 27 April and 30 September 2020) in circumstances where Covid-19 has had a financial effect on the company. This means that statutory demands served from 1 March 2020 which go unpaid cannot form the basis of a winding-up petition and are effectively void.

On 24 September 2020, the government announced that the restriction on statutory demands and winding up petitions would be extended to 31 December 2020 to protect companies from aggressive debt collections.

Are there any remedies which are still available?

Despite the restrictions in place, there are still a number of remedies available to landlords:

  • Debt recovery - Landlords are able to issue court proceedings to recover rent arrears (and other sums due under the lease) from their tenants together with interest and costs. Costs include court fees which are calculated as a percentage of the sum claimed up to a maximum fee of £10,000. However, landlords should bear in mind that that this process is likely to be slower than usual and it could be several months before a judgment is obtained. Landlords will need to consider whether they will be able to enforce the debt once a judgment is obtained.
  • Pursuing an existing guarantor - A guarantor to a lease generally has a co-extensive liability with that of the tenant.  Therefore, a landlord should be able to recover the rent directly from the guarantor (subject to any specific requirements specified within the guarantee).
  • Drawing down from the rent deposit - A landlord may be able to draw down from the rent deposit, although the terms of the rent deposit deed will need to be checked. Whilst this may help in the short term, a tenant may not have the funds to top it up. It may be deemed unreasonable for a landlord to take action requiring the tenant to top it up meaning that there may not be funds available for less clear cut breaches, such as dilapidations.
  • Pursuing a former tenant and their guarantor - A landlord will need to check whether the lease is an old lease (i.e. granted prior to 1 January 1996) or a new lease (i.e. granted on or after 1 January 1996). There are statutory provisions in place requiring the service of a notice on the former tenant or guarantor within six months of the debt falling due. If the former tenant or guarantor does not pay the arrears, then a landlord may be restricted in pursuing other remedies.
  • Pursuing a subtenant - if a tenant has sublet its premises, a landlord is able to serve notice directly on its subtenant requiring it to pay the rent directly to the superior landlord rather than to its immediate tenant. However, if payment is not made then there are restrictions on what further action a landlord can take (the same restrictions apply as set out in the section on CRAR above).

Where are we with the Code of Practice?

Parties have been encouraged throughout to try and reach an agreement. On 19 June, the government published a protocol designed to encourage commercial landlords and tenants to co-operate and to negotiate affordable rental agreements during this period of crisis.

The starting point is that tenants remain liable to pay their rent and those who are able to pay should continue to do so. Those tenants who are unable to do so should speak with their landlord and be transparent about their financial position and the protocol focuses on both parties sharing the burden where possible. The protocol was introduced relatively late in the day meaning that a large number discussions between landlords and their tenants had already taken place. Many now have concession agreements in place. However, now that the restrictions have been extended further affecting another two quarter’s rent, it is critical for parties to co-operate. 

It is an opportunity for parties to be creative on their negotiations during this period. Discussions may lead to a full renegotiation of the lease or a re-structure of rental payments. Possible avenues to consider are monthly rents (instead of quarterly), extending leases or break dates, allowing a rent free period or switching to a turnover or an all inclusive rent and widening service charge provisions to incorporate additional costs arising from the pandemic. 

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This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.