COVID-19: Protection from forfeiture for non-payment of rent for business tenancies in England and recovery of rent by Commercial Rent Arrears Recovery extended to 25 March 2022
Background
Following the COVID-19 pandemic, The Coronavirus Act 2020 (which became law on 25 March 2020) introduced a moratorium to prevent landlords from taking action against tenants for unpaid rent.
The result is that landlords have been unable to forfeit leases for non-payment of rent since 25 March 2020.
The moratorium was due to end on 30 June 2021 but has now been extended until 25 March 2022.
What does the moratorium mean in practice?
The moratorium does not prevent rent from accruing and so landlords and tenants should try to work together to reach an agreement as to how the arrears will be paid. However, commercial tenants will continue to be protected from eviction until 25 March 2022.
Additionally, the moratorium does not prevent landlords from forfeiting commercial leases for breaches of other lease covenants, such as sub-letting without consent etc.
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. CRAR came into force on 6 April 2014. However, the moratorium has restricted the use of CRAR; the rent arrears must amount to at least:
- 189 days’ rent on or after 24 June 2020 (but before 29 September 2020);
- 276 days’ rent on or after 29 September 2020 (but before 25 December 2020);
- 366 days’ rent on or after 25 December 2020 (but before 25 March 2021);
- 457 days’ rent on or after 25 March 2021 (but before 24 June 2021); or
- 554 days’ rent on or after 24 June 2021.
A statutory demand is a written demand for payment of a debt (in a prescribed format). They are often issued to put pressure on tenants to pay. A real benefit is that the tenant only has 18 days (once “personally served”) to apply to Court to “set” the statutory demand “aside”. If the tenant fails to do so, it will have no defence to the claim and on the 22nd day after service, the landlord can commence Bankruptcy proceedings by filing at Court a Bankruptcy Petition. However, this only applies if the tenant is an “individual”, not a company.
A Winding-Up Petition is an application that a company debtor be “wound up” on the ground that it is unable to pay its debts as they fall due. However, petitions cannot successfully be presented between 27 April 2020 and 30 September 2021 (following the most recent extension) where COVID-19 has had a financial effect on the company unless the company would be unable to pay its debts regardless of COVID-19; this is often very difficult to prove.
The Code of Practice for the Commercial Property Sector (“the Code”)
In June 2020, the government published the Code, developed with industry leaders to “to encourage commercial tenants and landlords to work together to protect viable businesses”. The Code is voluntary but it is expected that the Court will refer to it as “best practice” i.e. landlords will be expected to show that they attempted to negotiate with their tenants and visa versa.
So, if you have a tenant (which is a company) what next?
The above does not stop landlords from pursuing their tenants. A judgement handed down this year has seen the High Court criticise tenants for “taking the mick”. In Bank of New York Mellon (International) Ltd and another v Cine-UK Ltd and others [2021] a number of tenants had been unable to trade to varying degrees during periods of Government imposed lockdown related to the Covid-19 pandemic and arrears had accrued from March 2020. The landlords had pursued the arrears through the Court (as a debt claim) and subsequently made applications for summary judgment on their claims. In response, the tenants raised various grounds of defence, including “the landlords should have been negotiating with the tenants pursuant to the Code of Practice rather than pursuing litigation”.
The Judge disagreed and commented that the Code sits outside of the litigation process. As he put it: “I… do not see that the existence of a voluntary Code encouraging negotiation should in any way obstruct a claimant who contents that they have a clear case seeking summary judgement and, assuming that such a clear case is made out, from obtaining it at this point”.
Conclusion
Despite the above, as recovering debts via the County Court or High Court can be expensive (and take a long time, especially if defended) the extension to the moratorium in England will be disappointing for landlords whose income will have been affected and whose options remain limited when facing tenants who refuse to engage in an effort to address arrears of rent.
Moreover, it remains to be seen whether or not the Code will have any significant effect in practice. Generally, the advice is- contact the tenant, engage with it and see what is offered.
At Napthens we’re able to advise and assist on available options and work with landlords and tenants to understand their options, give pragmatic, commercial advice and ensure the parties (as far as possible) work collaboratively together to achieve a mutually agreed outcome.
