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Commercial landlords continue to face enforcement obstacles regarding unpaid rent as pandemic unfolds
The Government has confirmed that measures protecting tenants from enforcement action during the pandemic in relation to unpaid rent will continue until 31 March 2021. In doing so, it was indicated that there will be no further extensions beyond that point. However, as with so many aspects of the response to the pandemic, the situation is fluid and the legal approach to dealing with this issue remains under review.
This is emphasised by the extended moratorium procedure regarding insolvency and the temporary nature of the code of practice for dealing with commercial leases, which is pending supplementary guidance. And coming down the line is an over-arching review of the Landlord and Tenant Act 1954 which will address the impact of COVID-19 on the property market and assess rent payment model options going forward.
Fundamentally, the recent legislative changes only serve to defer payment obligations and delay landlords’ access to enforcement mechanisms. Depending on the terms of lease, late rent payment usually allows interest to accrue and, despite the measures currently in place, this remains the case.
So, what are the possible remedies available to landlords?
Where relevant amounts are overdue, it’s generally possible to draw on a rent deposit. However, it’s necessary for landlords to check the terms of the deposit deed in question for to ensure that any requirements and limitations are followed.
Usually, the tenant is obliged to replace the amount withdrawn. Should the tenant enter into administration and the premises are used for the benefit of the administration, rent for the period of such use is considered an expense of the administration and is payable in priority to unsecured creditors, among others. The obligation to replace a deposit would not be prioritised in this way.
Where applicable, landlords are free to seek payment of rent and other sums directly under a guarantee or letter of credit. However, this is subject to the restrictions on enforcement action which, in practice, may make this remedy ineffectual. Rights to forfeit for other breaches of the lease remain unaffected.
Commercial Rent Arrears Recovery
CRAR applies only to principal rent plus interest and VAT (and not to service charge or insurance rent) and allows for the seizure and sale of a tenant’s goods to recover arrears. From 25 December 2020 to 31 March 2021, CRAR will only be exercisable if at least 366 days’ unpaid rent is due.
Where premises are underlet, it’s possible for a landlord to require a subtenant to pay its rent directly to them in order to discharge arrears of principal rent (plus VAT and interest) owed by the intermediate tenant. This applies only if CRAR is exercisable.
This is a formal written demand for payment of a debt (such as rent) within 21 days. A failure to comply with a statutory demand may be used as grounds to present a winding-up petition. The Corporate Insolvency and Governance Act 2020 (“CIGA 2020”) prohibits presentation of a winding-up petition based on a statutory demand served between 1 March 2020 and 31 March 2021 (extended from 31 December 2020).
Creditors, including landlords, can petition for the winding-up of a company that owes them money in certain circumstances, including if they are able to show that the company is unable to pay its debts. CIGA 2020 prohibits the presentation of a winding-up petition unless the creditor has reasonable grounds to believe that COVID-19 has not had a financial effect on the company, or that the company’s inability to pay its debts would have arisen anyway. This applies with retrospective effect from 27 April 2020 to 31 March 2021 (extended from 31 December 2020).
In summary, although applications by landlords to place a company in administration have significantly reduced in the current circumstances, such action is not prohibited. As with winding-up petitions, a lack of information about the tenant company is likely to be a major obstacle to such an application proving successful.
Landlords can continue to issue Court proceedings to recover sums due under the lease as a debt. Although not caught by the restrictions affecting forfeiture, CRAR and statutory demands, debt claims can be a drawn out and costly process, and therefore the challenges facing landlords when it comes to enforcement are likely to present themselves for the foreseeable future.
If you need any advice regarding rent owed to you as a commercial landlord or, if you are a commercial tenant and you want to discuss your options, please do not hesitate to contact me directly.