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Commercial leases and COVID: where are we now?

  • United Kingdom
  • Litigation and dispute management
  • Real estate dispute resolution
  • Real estate litigation

14-10-2020

Whilst lockdown restrictions had been easing across the nation many relating to the rights and
liabilities of landlords and tenants continued. Here we look at where we are now on some key restrictions and what options may remain available for landlords:

Forfeiture

The Government provided commercial tenants with a degree of breathing space in March by imposing, by Section 82 of the Coronavirus Act 2020 (the “Act”), a mortarium on the termination of business tenancies by forfeiture for arrears of rent. Rent is widely defined in the Act as any payment the tenant is liable to pay under a relevant business tenancy. The definition of business tenancies means some tenancies are not captured but most are.  Landlords cannot waive the right to forfeit for non-payment during the moratorium other than by express waiver in writing.  Landlords should take care, however, as waiver of other breaches giving rise to the right to forfeit is still possible.  The provision also states that a landlord cannot object to a new tenancy under the Landlord and Tenant Act 1954 based on failure by the tenant to pay rent.  The moratorium was originally to apply from 25 March to 30 June but this was extended to 30 September and then again to 31 December.

CRAR

In April further support was provided by enacting temporary changes to the Commercial Rent Arrears Recovery (“CRAR”) procedure. Initially the minimum amount of rent that had to be outstanding before the landlord was able to recover the arrears using CRAR was increased from seven days’ rent to 90 days’ rent by The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020. Further secondary legislation in June and September increased the minimum amount that must be outstanding to an amount equal to 276 days’ rent where notice of enforcement is given on or before 24 December and 366 days’ rent where notice of enforcement is given on or after 25 December. For as long as these temporary changes are in place the landlord is also unable to recover from the sub-tenant through the CRAR procedure.

Possession

Proceedings for possession under CPR 55 (applicable to both commercial and residential properties) were stayed until 20 September.  Initially, the stay was to last 90 days from 27 March under CPR PD 51Z, a further stay under CPR 55.29 was due to expire in August, but then extended. There were some exceptions and claims could still be commenced but those claims were automatically stayed.  The courts now face a vast case load of possession claims.

Statutory demands and winding-up petitions

The far reaching Corporate Insolvency and Governance Act 2020 (“CIGA”) which came into effect in June also restricts a landlord’s options, as creditor, to recover rent and other sums due under commercial leases. In particular it temporarily limits the ability to use statutory demands or winding-up petitions to prompt payment. These limitations have recently been extended by The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020. As such, creditors cannot present a winding-up petition based on a statutory demand issued between 1 March and 31 December. Further, winding-up petitions presented on other grounds between 27 April and 31 December can only succeed if the applicant can show that COVID has not affected the debtor or that it would be in the same position even if COVID had not had a financial effect on it. Difficult to prove even where tenants have continued to trade. Note however that the CIGA only applies to corporate debtors and therefore tenants who are individuals are not captured.

Short term moratorium

A more permanent measure introduced by CIGA is the short term Moratorium (with provisions for extension). Aimed at assisting companies that are insolvent or likely to become insolvent but capable of rescue as a going concern. Key features are:
(i) a “payment holiday” for pre-moratorium debts – the costs of continuing to trade during the moratorium (including rent – although it is not defined) remain payable (ii) the presentation of winding-up petitions and the appointment of administrators is prohibited, except in limited circumstances (iii) except with the permission of the Court landlords cannot exercise rights of forfeiture/creditors cannot enforce security in most circumstances/no legal process can be commenced or continued against the company, unless it is employment-related/creditors cannot take action in respect of debts for which the company has a “payment holiday” or apply to the Court for permission to do so.

Rent deposits/guarantors/former tenants and their guarantors

Landlords may still be able to draw down against rent deposits or recover from guarantees or former tenants where they exist.  The terms of the arrangement concerned (e.g. rent deposit deed/ AGA/ guarantee) will need to be read carefully to ensure that the right to recover by the particular means has arisen.  Any contractual or statutory step required to be taken to secure recovery must also be followed carefully (e.g. giving notice with prescribed details and within prescribed periods). Where recovery is sought from former tenants or their guarantor landlords should appreciate that if all sums are paid then that former tenant or their guarantor has the right to call for an "overriding lease" which will make them the landlord’s tenant and convert the existing tenant into a subtenant.

Mixed use considerations

Residential considerations may also come to pay when looking at commercial leases where a mixed use element is involved. Beyond the scope of this note but changes include an extended notice period applying when serving sections 8 and/or 21 notices to terminate.

Court proceedings

Landlords still have the option of commencing proceedings against tenants for unpaid rent as a debt. However, the Court issue fee (currently £10,000 where the debt exceeds £200,000), the anticipated delay in securing a hearing/order (even possibly where sought by summary judgment), and the uncertainty over recovery even once Judgement is secured are all factors likely to be playing on landlords’ minds when deciding whether to proceed down this route.

Landlords may wish to consider the availability of litigation funding products for appropriate cases.

Code of practice

It is worth noting that on 19 June the Government issued a Code of Practice for commercial property relationships during the pandemic. It reinforces the message that whilst COVID does not change the underlying relationship between landlords and tenants (or guarantors) the parties should try to co-operate to try to reach agreements where tenants suffer difficulties with making payment as a result of COVID. Landlords should take care, however, when reaching any agreement that varies the lease to ensure that such variation does not release any guarantors in place from part or all of its liability. Whilst the Code is voluntary it may offer an additional tool to those tenants wishing to persuade their landlords to be gentle on them or by landlords to prompt a response from those tenants refusing to pay and engage!

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