Solicitor Asma Muneer, in our Dispute Resolution team, discusses the limitations affecting commercial landlords' ability to recover outstanding rents and what might happen next.
Since the COVID-19 pandemic struck, in the first quarter of 2020, significant limitations have been placed on commercial landlords' ability to recover outstanding rents. This has put many landlords in a difficult situation as rent arrears continue to accrue and the recovery options remain restricted more than a year on.
The Code of Practice, published by the Government on 19 June 2020, is a voluntary code to assist landlords and tenants. The main principle of the code is "transparency and collaboration", and the Government's aim is to encourage landlords and tenants to act "reasonably and responsibly" in light of the pandemic. Where commercial tenants’ ability to pay rent has been severely affected, many landlords and tenants have had to open a dialogue to try to agree the best solution for both parties in the current circumstances and to maintain their business relationships going forward.
The current restrictions which remain in place and are affecting landlords are:
- Forfeiture of commercial leases – Section 82 Coronavirus Act 2020 prevents any forfeiture between 26 March 2020 and 30 June 2021, whether by court order or peaceable re-entry, of the vast majority of commercial leases for non-payment of rent.
- The Civil Procedure Rules (Practice Direction 55C) allowed for the recommencement of possession proceedings in the courts since the stay expired on 20 September 2020. If a landlord has a claim which was issued in the Courts before 3 August 2020, the landlord must have served a 'reactivation notice' in order for the claim to be listed or relisted. The practice direction also states that the usual provision that the initial hearing in a possession claim should be within 8 weeks of issue of the claim will not apply for the period from 20 September 2020 until 30 July 2021. This suggests continued delays in possession proceedings whilst the Courts deal with the backlog of stayed claims.
- Commercial Rent Arrears Recovery (CRAR) – The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 prevented landlords from using CRAR unless an amount of at least 90 days’ rent was due (it had previously been seven days or more). This amount has been increased several times and will reach 457 days between 25 March and 23 June 2021, and 554 days' rent between 24 June and 30 June 2021. This restriction will apply until 30 June 2021.
- Statutory demands and winding-up – The Corporate Insolvency and Governance Act 2020 prohibits the presentation of a winding-up petition based on an unsatisfied statutory demands served between 1 March 2020 and 30 June 2021. It is also not possible to present a winding up petition between 27 April 2020 and 30 June 2021, unless it can be shown that coronavirus has not worsened the debtor's financial position or the debtor could not have paid its debts even if there had been no such worsening of its financial position.
The various enforcement restrictions are currently due to expire at the end of June 2021, by which time another quarter day will have passed and another rent payment will have fallen due.
In the meantime, landlords in England and Wales can still recover rent and other sums due to them despite the above Coronavirus legislation. Depending on the specific circumstances, remaining options for landlords include the following, but not limited to:
- recovering sums owed by tenants from former tenants or their guarantors;
- recovering from existing guarantors;
- recovering from subtenants;
- drawing down on rent deposits;
- debt recovery proceedings;
- forfeiture for other breaches of the lease other than non-payment of rent by serving a notice under section 146 of the Law of Property Act 1925.
There is a possibility that the moratoriums may be extended again. The Government announced a consultation in April 2021 on what to do about commercial rent arrears when the restrictions end. The government has proposed six possible options, some of which include allowing forfeitures to proceed, encouraging mediation, or binding and non-binding adjudication. The consultation is now closed and further announcements are anticipated before the end of June 2021.
As it is possible that some or all of the restrictions may continue or be replaced with alternatives, it would be worthwhile for landlords and tenants to consider their positions and look to reach an agreement voluntarily between themselves before further announcements are made.
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This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.