What other options are available for a landlord to pursue non-payment of rent whilst forfeiture is prevented under the Coronavirus Act 2020 and which tenants should be wary of when choosing not to pay their rent?
Under the terms of the Coronavirus Act 2020, landlords are currently prevented from issuing forfeiture proceedings against tenants for non-payment of rent until the current moratorium ends. This is currently 30 June 2020, but it could be extended by the government. However, landlords and tenants alike should be aware that there are still a number of other options available in the meantime to pursue tenants for non-payment of the rent. These include:
1. Making a debt claim – landlords can issue a civil claim for non-payment of rent. Interest would be charged at the rate set out in the lease on the unpaid sums. There is obviously a time and cost element to bringing this type of claim as the process can be costly and protracted. If the tenant has previously been a good payer, and it is simply due to the current situation as to why they are not currently able to pay the rent, then this may be sufficient comfort for the landlord not the pursue this type of claim, but the option still exists.
2. Issuing a statutory demand – this is the most aggressive approach a landlord could take, as it effectively gives the tenant 21 days to pay the sums due or they can commence winding up proceedings. Whilst the threat of insolvency is a significant concern for a tenant, should the landlord follow through on the threat, this could mean the leases ends up in the hands of a liquidator who may disclaim the lease. This would then undermine the landlord’s ability to recover the debt in full. There has been some discussion about this in the press recently, and a call by a number of gym tenants for the government to take immediate action to prevent landlords issuing statutory demands and making businesses insolvent. We will have to wait and see if any such action is taken but in the meantime, this process is available and the recent press coverage will potentially highlight this option to landlords who perhaps were not already aware of it.
3. Commencing winding up proceedings – as above, if a statutory demand has been issued, and the debt remains unpaid after the 21 days, a landlord can commence winding up proceedings. There is currently no procedure for a company to apply to set aside a statutory demand served on it, therefore a company wishing to avoid a creditor issuing winding-up proceedings on the basis of a statutory demand would need to apply to restrain the presentation of a petition as this is their only available remedy. The effects of the presentation of a winding-up petition on a company can be immediate and, so it is therefore important that any application is made promptly. If it appears that the debtor company is solvent then the court is likely to grant an injunction preventing the presentation of a winding-up petition where one of the following apply:
- The debt is genuinely disputed on substantial grounds.
- The company has a cross-claim or right of set-off against the creditor that exceeds the amount claimed in the demand.
- The company has a reasonable excuse for not paying the debt claimed – given the current lock down due to the Covid-19 pandemic, lack of cash flow and the resulting downturn in business, this may be a sufficient reasonable excuse, but as this has not yet been tested in the courts, it is difficult to say for certain how this would be dealt with by them.
4. Commercial Rent Arrears Recovery (CRAR) – this is a method of enforcement that was introduced in 2014 as an alternative to the common law right for distress. It enables landlords of commercial premises to take control of and sell tenant’s assets on the premises. This is therefore an option for a landlord but if it pursues the sale of all a tenant’s assets then this could severely impact their ability to continue their business and a such increases the likelihood of insolvency and the ending (disclaimer) of the lease as a result. Therefore, before implementing this course of action, it would be worth a landlord considering whether seizure might have a longer-term impact upon the continued viability of the tenant’s operation from the premises and also whether the tenant has sufficiently valuable assets to cover its debt. If the answer to the latter question is no, then this may not be the best course of action.
5. Pursuing an existing guarantor – if there is an existing guarantor under the lease or a previous tenant under an authorised guarantee agreement, the landlord may wish to pursue them for payment of the rent. Who the landlord can pursue will depend upon whether the lease is a “new tenancy” for the purposes of the Landlord and Tenant (Covenants) Act 1995. If the landlord wishes to pursue a former tenant or guarantor under the 1995 Act, then only the previous 6 months’ rent can be claimed. The 1995 Act also enables the landlord to request an overriding lease, which is a new lease directly between the landlord and the former tenant or guarantor. The landlord should therefore carefully consider whether they would want the former tenant or guarantor as their direct tenant, particularly if they are of a lesser covenant strength than the existing tenant.
6. Withdrawal from a rent deposit – if there is a rent deposit held by the landlord, they may seek to draw on funds from the deposit to cover the outstanding rent. Whilst drawdown might solve an immediate rental stream issue for the landlord, in the longer term it could dilute the investment value of the lease if the deposit isn’t promptly topped back up again (which is unlikely if there is a current cash flow issue). However, failure to replenish the deposit would usually give rise to a right to forfeit the lease. It’s not clear from the legislation (and therefore until the situation is tested by the courts), whether the provisions of the Coronavirus Act 2020 would prevent forfeiture by a landlord for failure by the tenant to top up a rent deposit. On a strict interpretation, it seems that the Act would not prevent a landlord pursuing this option.
So, whilst the Coronavirus Act 2020 does give some respite to tenants who are struggling to pay their rent, they should also be mindful of the remedies available to landlords who wish to pursue them for their arrears. It is also worth bearing in mind that even though landlords cannot pursue forfeiture for non-payment of rent during the moratorium, the outstanding sums will still be due at the end of June, so if the March quarter’s rents are currently unpaid, tenants could still end up with having 6 months’ rent to pay at the end of June or risk the landlord forfeiting the lease. With income significantly reduced in the interim, this will only increase the burden in the longer term.
It would therefore be prudent for tenants to start a dialogue with their landlords as early as possible to negotiate rent holidays, reduced rents or alternative payment schedules for the March quarter and beyond, as a means of lessening the financial burden once the government relief measures come to an end.
Landlords should also consider the longer term impact of taking one of these alternative forms of action against tenants in arrears. Pursuing a tenant who is currently struggling due to the financial burden of the current lock down situation could push them over the edge into insolvency, which will only result in headaches further down the line. Should the tenant go insolvent and the lease end up being disclaimed, the landlord would end up with empty premises. Given, that it is likely to be a while before we fully recover from the current situation, those premises could be empty for some time. Landlords would therefore be advised to seek to work with their tenants to agree a way forward that both can be comfortable with to avoid lengthy voids and to keep at least some income coming in.
For any further advice on the issues raised above or for any other queries or assistance with your commercial lease, please contact Helen Brewer at email@example.com.