One welcome upshot from the pandemic has been the overwhelming desire of many tenants and landlords to work together to find a solution to the impact of business closures and social distancing. Tenants have cashflow issues so have sought concessions; landlords themselves require income, but appreciate that tenant insolvency and empty properties are not attractive propositions when there is hardly a clamour for additional space.
However, there have been fallouts. Certain landlords stand accused of being overly aggressive, whilst there is a feeling in the market that certain tenants are pushing the boundaries too far, whether by demanding rather than seeking concessions or by shielding cash reserves.
Tenants have been looking at arguments surrounding rent suspension clauses, frustration/termination of their leases and force majeure provisions to assist them where they are in financial distress. In the majority of cases, the terms of the lease will continue unabated and there will be, barring a goodwill concession, various remedies available to landlords should tenants fail to pay rent or comply with their lease terms.
The Government has announced various measures to allow parties ‘breathing space’. Both landlords and tenants need to know what this breathing space means and how it impacts upon the options available to the landlord.
Forfeiture (eviction by the landlord)
- The Coronavirus Act has barred landlords from seeking forfeiture of all business leases until 30 June 2020 because the tenant has not paid the rent or other sums This date may well be extended, as the likelihood of tenants suddenly finding the resources to pay the June quarter rent is not high.
- Landlords can still forfeit for grounds not related to rent, but s.146 notices will have to be served first, giving the tenant a reasonable time to remedy, and Courts will not be rushing to grant forfeiture orders. From a commercial perspective, landlords may not want to find themselves having to re-market an empty property.
- One of the most effective, but aggressive, steps that landlords have historically taken to enforce compliance is to issue statutory demands or winding up petitions where the tenant has fallen into arrears. The Corporate Insolvency and Governance Bill, due to be ratified imminently, will put a temporary stop on this remedy until 30 June (unless extended). Although details are currently sketchy, it is thought that landlords will not be able to serve statutory demands on tenants nor pursue winding up orders against them where their default is as a result of Covid-19. Expect a raft of litigation on what ‘as a result of Covid-19’
Commercial Rent Arrears Recovery Scheme (CRAR)
- CRAR, previously known as distress, is where a landlord can serve notice on a tenant stating that it intends to seize property belonging to the tenant in order to pay off arrears of rent. Although still available to a landlord, the Government is bringing in legislation that means a tenant must owe 90 days’ worth of arrears before the landlord can exercise this remedy. There are also practical issues at the moment as to how enforcement agents could safely access the tenant’s premises in order to seize the goods.
- The landlord’s right to sue for breach of the lease and recover arrears or damages has not been affected by the Coronavirus legislation. The Courts are trying to maintain a ‘business as usual’ approach, albeit there is an understandable tendency to prioritise urgent applications and an even greater focus on parties seeking to compromise without Court involvement. Again, if a Court order has been granted against the tenant, a landlord may have practical difficulties in enforcing the Order whilst current restrictions remain in place.
Claims against Guarantors, Original/Previous Tenants and Sub-Tenants
- Guarantors under leases are often primarily liable for the payment of rents and other sums, so landlords can make immediate demands for payment from guarantors as if the guarantor were the tenant under the lease. Guarantors can also be called upon to ‘step into’ the tenancy in certain circumstances.
- Landlords will also check whether any original or previous tenants remain liable; ditto with former guarantors. Landlords should remember the 17 notice procedure needed to enforce payment against former tenants or their guarantors, where notices have to be served within 6 months of the debt falling due.
- With sub-tenants, landlords can serve a 81 notice requiring them to pay the rent due under the sub-lease directly to the landlord rather than to the intermediate tenant, where that intermediate tenant owes rent to the landlord. This procedure is dependent upon CRAR being exercisable, so please note our comments above.
- No recent legislation has affected the landlord’s right to claim under a rent deposit. Care should be taken so that the landlord complies with any contractual terms enshrined in the rent deposit deed, particularly with regard to the service of notice and the grounds for withdrawal. Landlords also need to review how the rent deposit is held, particularly with tenant insolvency being an issue and whether a rent deposit would fall back into the insolvency pot.
If you need further advice on this topic, please get in touch with your normal Real Estate contact at Mills & Reeve LLP or please contact Richard New.
Visit the Mills & Reeve Coronavirus hub here.