UPDATED: 27TH APRIL 2020
If you own a property and rent it to a business, there are new rules about what you can do if your tenant does not pay the rent when it is due. The Government introduced emergency legislation, the Coronavirus Act 2020 (which can be viewed in full here) which among other things, introduced these new rules. The rules mainly protect tenants who it was assumed would increasingly have difficulty paying their rent.
Around the same time, the Court rules (known as the Civil Procedure Rules or CPR) have also changed to suspend any ongoing Court cases for possession of property - for 90 days. Full details of the new Practice Direction can be seen here.
Advice for landlords renting out commercial properties
Many business tenants are facing immense difficulties in the current circumstances that the Coronavirus has created. They may have seen a drop in income and may have had to close altogether (for example many high street shops).
Can I terminate the lease if my tenant stops paying their rent?
The Act has introduced a ban on forfeiting commercial leases for the non-payment of rent. Forfeiture is the process whereby a landlord terminates the lease due to the tenant breaching the terms of that lease. This can be done either by re-entering the property peaceably or by way of court proceedings. This ban will operate during the ‘relevant period’, namely from 26 March 2020 to 30 June 2020, albeit there is a mechanism within the Act for this to be extended if the Government deem it necessary.
This means that there is the potential for a tenant to remain in occupation of a property until at least 30 June 2020, despite being unable to pay all rent due to their landlord. This will be the unfortunate reality for many landlords whose tenants have seen their income stream stop as a result of the lockdown.
On 27 April 2020, the Government announced a further change to the Corporate Insolvency and Governance Bill which is currently being fast tracked through Parliament. The Bill’s intention is to provide additional protection to retail tenants.
The current ban on forfeiture left open the prospect of landlords seeking to enforce the payment of rent by alternative means, such as by taking possession of the tenant’s goods under the Commercial Rent Arears Recovery procedure (CRAR), or by petitioning the court to wind up the tenant due to non-payment. The new rules introduced by the Bill are designed to plug these gaps in the protection given to commercial tenants by the Coronavirus Act 2020.
The new rules on winding up petitions will affect all petitions presented to court between 27 April 2020 and 30 June 2020. In essence, the court will vet any winding up petition presented during this period and, if the inability to pay appears to relate to the Coronavirus situation, then the court will decline to issue the petition. In practice, this is likely to mean that if the debt arose before the current crisis, then the court will probably allow the petition to proceed but if the debt has occurred since the outbreak of Coronavirus, then it will not.
The changes announced to CRAR are currently slightly ambiguous, stating that a full 90 days rent must be outstanding now before the CRAR procedure can be used. We at Tees suspect that the intention is that rent will need to be a full quarter in arrears before CRAR can be used. This change is currently in force until 30 June 2020 however, as with the ban on forfeiture of leases and the limitation on petitioning to wind up companies, the Government has reserved to itself the power to extend the period of operation.
I am currently in the process of forfeiting a lease, what happens now?
In response to the Act, the Court rules (known as the Civil Procedure Rules or CPR) have been temporarily changed to suspend any ongoing Court cases for forfeiture for 90 days. Therefore, if a landlord was in the middle of forfeiture proceedings as at 27 March 2020, then those proceedings have been suspended and no orders for possession will be granted until after 30 June 2020.
If the ‘relevant period’ is not extended, then as of 1 July 2020 a landlord will re-acquire the option of forfeiting a lease for non-payment of rent, and they will be able to pick up any claim for forfeiture which was previously suspended.
If there are rent arrears, should I look to forfeit my lease as soon as possible after the ‘relevant period’?
It is difficult to know how the economic situation will look come 1 July 2020. It may be the case that the prospects of finding a new tenant may be limited. What is more, due to the unprecedented nature of the Coronavirus situation, the Courts may take a dim view on landlords who move to forfeit a lease on the grounds of non-payment of rent, without first trying to work out a solution with their tenant.
Where possible, and where economically viable, landlords should seek to cooperate with tenants who are experiencing financial difficulties due to Coronavirus. This would be with the intention of reaching an agreement as to how rent and other lease payments can be structured to allow the lease to continue beyond the relevant period. Such an agreement can be documented in a variety of ways, including a simple side letter agreeing a temporary change to the rent payment mechanism, for example deferring rent payments or agreeing a temporary rent reduction.
Before any concessions are made, it’s prudent for tenants to take advantage of all Government assistance available to them. This includes furloughing staff, taking advice on the deferral of payment of VAT and Capital Gains Tax where applicable, or ascertaining their eligibility for a business rates holiday. Additionally, tenants may be eligible for a loan from their bank under the ‘Coronavirus Business Interruption Loan Scheme’.
What happens if I cannot come to a workable solution with my tenant?
Regrettably, there will be circumstances whereby a workable solution is not possible. Therefore forfeiting the lease after the relevant period will be the best economic decision for a landlord. In these situations, there are varying methods of forfeiting a lease dependent on the terms of the lease. If a landlord is unclear which method is available to them then it is strongly advised that they seek legal advice before taking steps to forfeit the lease. The wrong decision could at best result in wasted time, but at worst it could result in an invoice for their tenant’s legal costs.
If I have to forfeit the lease, can I recover the rent arrears?
If a landlord successfully forfeits the lease for non-payment of rent by way of peaceable re-entry, their next concern will be recovering any rent arrears. Save for extraordinary circumstances, a landlord will have a contractual right to recover rent arrears from their now ex-tenant. The value of this contractual right will depend on the financial standing of their ex-tenant. Due to the severe economic impact the Coronavirus is having upon businesses, and due to the tenant being unable to pay their rent in the first place, the ex-tenant’s financial standing is likely to be limited. Of course, where there are guarantors and/or personal guarantees, the prospects of recovering rent arears could be significantly higher.
Matters will be complicated slightly in situations where a tenant has become insolvent which may be the sad reality for some. When a tenant becomes insolvent, the landlord will be required to engage in the insolvency process by liaising with the liquidator, administrator or trustee in bankruptcy, but the landlord may well find themselves on a long list of creditors.
What if my tenant has breached another term of the lease? Can I still obtain possession?
If there is a breach of the lease which does not relate to rent, then the first step will be to issue a notice, known as a section 146 notice, which should be prepared by a solicitor.
The legislation only applies to possession being sought on the basis of rent arrears. However the changes to the Court rules apply to all claims for breach of the lease, meaning any claim issued at Court would be put on hold for 90 days (and this period may be extended).
How can I get help getting an eviction?
It’s important that you get specialist legal advice if you are trying to remove a business from your property that they are renting. The recent changes in the law due to the Coronavirus situation have made it harder for landlords to evict people, as part of measures to support the economy as a whole. Your first step is to consult a lawyer with expertise in this area of property law.
Here to help
Tees has an array of specialists in commercial property, property litigation and insolvency who can provide you with expert and individually tailored legal advice. With so much uncertainty about how the economic backdrop will look when 1 July 2020 comes, taking steps to understand your options so that you can make an informed decision and/or make adequate preparations is vital.