The coronavirus (COVID-19) crisis has presented numerous challenges for businesses across the UK. The 25th of March is the quarter rent day for many commercial tenants, who will now be liable to pay their rent. However, with the introduction of measures aimed at slowing the virus, many commercial tenants have been required to close their premises, often effectively shutting down the business and even more are suffering cash flow issues and may find themselves, through no fault of their own, unable to pay rent.
What action can landlords take against commercial tenants unable to pay rent?
The most common remedy sought by landlords whose commercial tenants have not paid rent is forfeiture (i.e. termination) of the lease. However, the government has recognised the need to protect commercial tenants from potential eviction during this pandemic and has introduced in the Coronavirus Bill a moratorium on the forfeiture of business tenancies for three months. This would mean that a landlord cannot terminate a business tenancy on the grounds of non-payment of rent until 30 June 2020.
The proposed moratorium states:
“A right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period.”
The proposed moratorium only applies to non-payment of rent. Consequently, a landlord could forfeit a lease on other grounds, such as a tenant breaching other obligations under the lease (although further usual formalities will apply). Additionally, the moratorium only prevents enforcement of the right to forfeiture and does not prevent the right arising whilst the moratorium is in place. Therefore, if a tenant does not pay rent during the moratorium and rent remains outstanding when the moratorium expires, the landlord may seek to forfeit the lease upon the moratorium’s expiry.
Upon the expiry of the proposed moratorium, the landlord can forfeit the lease for non-payment of rent by peaceful re-entry, which is where the landlord attends the property when the property is empty and changes the locks. The landlord can also forfeit the lease by issuing court proceedings, although this is a much slower process and the landlord may incur significant legal fees.
Forfeiture brings a lease to an immediate end. However, a landlord cannot forfeit a lease for non-payment of rent until the right to forfeit has arisen in accordance with the terms of the lease, which is generally after a specified time since the rent became due (e.g. 21 days). It is crucial the terms of the lease are examined and the tenant is aware of when the landlord has the right to forfeit the lease.
Whilst the proposed moratorium will prevent a landlord enforcing a right to forfeiture, a landlord may still take the following enforcement action:
1. Issue proceedings against a commercial tenant for recovery of rent arrears
The most likely course of action for a landlord would be to allow the rent arrears to mount up and then, when the business can begin trading again, look to recover the arrears. Landlords may take a commercial approach and settle any outstanding rent through agreement and a payment plan. Nevertheless, there may be some landlords who look to issue court proceedings for the recovery of the full amount of rent arrears immediately.
Proceedings for rent arrears would likely take several months, but if successful, the landlord would be entitled to all arrears plus the costs incurred in bringing such proceedings. Whilst the courts have not yet issued guidance on their approach during the coronavirus pandemic, it is very unlikely a court would look favourably upon a landlord issuing such court proceedings during a time of national crisis.
2. Commercial Rent Arrears Recovery (CRAR)
If rent has not been paid for seven days after falling due, a landlord can instruct an enforcement agent in writing to seize goods from the property belonging to the tenant up to the value of any unpaid rent. The enforcement agent is legally obligated to provide a tenant with seven clear days’ notice prior to entering the property to seize goods.
A landlord may be reluctant to take this type of enforcement action, as seizing goods may impede the tenant’s ability to pay future rent. Further, in light of the government’s restrictions on movement, it would be unlikely such action could be taken at this time.
3. Insolvency proceedings against a commercial tenant
A landlord could seek to make the tenant insolvent over rent arrears, either by a bankruptcy petition (if the tenant is an individual) or by presenting a winding-up petition (if the tenant is a company). A landlord cannot make a tenant insolvent without serving notice and beginning court proceedings. Whilst the insolvency courts have not yet issued guidance on their approach during the coronavirus pandemic, again, it is very unlikely a court would look favourably upon a landlord taking such action at this time.
What actions can a commercial tenant take if they cannot pay their rent?
If you know your business cannot pay rent, it is best to approach your landlord, informing them of your current situation and try to reach an amicable agreement, potentially including a temporary suspension or reduction in rent. Any agreement should be properly documented. The moratorium proposed by the government means that such discussions can be had without the threat of immediate forfeiture. Further, with the economic impact of the coronavirus still largely unknown, landlords may wish to retain tenants, as it may be unlikely that landlords will be able to find new tenants quickly.
It should however be noted that during the proposed moratorium, any action taken by a landlord other than an express waiver given in writing, will not be regarded as waiving their right to forfeiture for non-payment of rent. Tenants should bear this in mind when discussing rent arrears with their landlord during the moratorium and should request such a waiver where appropriate.
Our Property Litigation Team are experts in this area. Should you need advice, do not hesitate to contact us.
This blog was written by Joseph Young.
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