Coauthored by Darryn Harris and Russell May
A government press release issued on 23 April 2020 will be welcomed by commercial tenants up and down the country, particularly those in the retail and leisure industries, but it will not make such welcome reading for landlords.
In the current climate many commercial tenants are having a difficult time and consequently so too are landlords. The government has urged landlords and investors to work collaboratively with high street businesses which have found themselves unable to pay their rent during the COVID-19 pandemic.
Most landlords and tenants are working well together to reach agreement in respect of rent, either moving rental payments to monthly rather than quarterly in advance, or deferring rental obligations for a specified period. The Government has already passed legislation which prevents Landlords from forfeiting a commercial lease until at least 30 June 2020, although that date may well be extended. However, until now it had not legislated against any of the other enforcement options available to Landlords. Some landlords have been putting tenants under considerable pressure by using aggressive debt recovery tactics. The government has stated that emergency legislation is now necessary to protect the “UK high street from aggressive rent collection.”
Winding Up Petitions and Statutory Demands
The government will introduce further restrictions on a landlord’s ability to pursue certain enforcement action against a tenant by temporarily banning the use of statutory demands and winding up petitions presented from Monday 27 April, through to 30 June, where a company cannot pay its bills due to coronavirus.
While the government plans to place restrictions on a landlord’s ability to make use of statutory demands, our understanding is that landlords will still be entitled to serve a statutory demand in a case where the tenant is not affected by COVID-19, can therefore pay its rent and is simply trying to take advantage of the COVID-19 situation.
It is not yet clear in which particular circumstances landlords will be prevented from issuing winding up petitions. The government has stated that “any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented or winding-up orders made, where the company’s inability to pay is the result of COVID-19.”
Exactly what is meant by “inability to pay (as a) result of COVID-19” or how the Court will review the petition is not clear from the press release. It does however suggest that there will be an additional hurdle for a landlord to first overcome if it wishes to present a winding up petition. There will presumably be an initial hearing to decide whether the tenant’s inability to pay is as a result of COVID-19 and whether the petition can proceed. It appears that there is unlikely to be an outright ban on winding up petitions for arrears of rent.
It seems highly likely that there will be court cases in the near future which will test the definition of “inability to pay as a result of COVID-19.” Most tenants in the retail and leisure sectors have been badly affected by COVID-19, but what about supermarkets whose businesses are booming? It is of course extremely unlikely that the likes of Tesco and Sainsbury’s will not be paying their rent at the moment, but this does show that there is an extreme range of differing circumstances even in similar industries.
Commercial Rent Arrears Recovery
Commercial Rent Arrears Recovery (CRAR) is a statutory procedure which allows landlords of commercial premises to recover rent arrears by taking control of the tenant’s goods and selling them in order to pay off the debt. During the lockdown this has not been utilised fully due to social distancing provisions, but some Landlords have started the process by using Bailiffs to serve the initial notices.
It is clear from the government announcement that it intends to bring legislation forward to prevent the use of CRAR unless there is more than 90 days’ worth of rent in arrears. This will certainly take a lot of the immediate pressure away from tenants.
Other options for Landlords
Landlords may therefore be obliged to consider other methods of recovery of rent, such as claiming against guarantors, drawing down on deposits in line with the requirements of any terms contained within a Lease or Rent Deposit Deed or by commencing a claim for the arrears in court, which for the time being at least is not prohibited by the government’s measures. However, this process will probably be very slow due to adjustments the courts have had to make.
For further information please contact, Russell May, Senior Associate - Solicitors, Property Disputes team by email at [email protected] or Oliver Fitzpatrick, Senior Associate - Solicitors, Business Support & Insolvency team by email [email protected].
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.