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 among other things, introduced these new rules. The rules mainly protect tenants who it was assumed would increasingly have difficulty paying their rent.
Advice for landlords renting out commercial properties
Many business tenants are facing immense difficulties under the current circumstances. They may have seen a drop in income and may have had to close altogether (for example many high street shops). At the same time, some commercial landlords are also facing considerable financial pressures. If you're in this situation, you may need to get specialist commercial property dispute advice.
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. Where this relates to the failure to pay rent, this can be done either by re-entering the property peaceably or by way of court proceedings.
This ban initially operated during the ‘relevant period’, namely from 26 March 2020 to 30 June 2020, however the mechanism within the Act for this to be extended the restrictions on forfeiture for non-payment of rent to 30 September 2020, then to 31 December 2020, then to 31 March 2021, then to 30 June 2021 and most recently to 25 March 2022 in England and until 30 September 2021 in Wales. Furthermore, an order already obtained cannot be enforced.
Landlords are also not able to use non-payment of rent from 26 March 2020 to 25 March 2022 as a ground to oppose a renewal of a lease that enjoys security of tenure under the Landlord and Tenant Act 1954.
The Government issued a Code of Practice for commercial property relationships during the COVID-19 pandemic which can be found here.
In summary the Code suggests:
- In all dealings with each other, landlords and tenants should act collaboratively, with transparency and in good faith. A unified approach is encouraged between stakeholders to help manage the consequences of COVID-19.
- Where businesses have sought government support during the pandemic, it should be recognised that this support is provided to help businesses meet their financial commitments, including lease rents and associated costs.
- Landlords and tenants should act reasonably and responsibly to identify mutual solutions.
Whilst the Code is deemed to have been successful in helping to structure negotiations between landlords and tenants; as compliance with it is voluntary, many landlords and tenants are not following the Code.
As such, the government has announced that primary legislation will be introduced that will ringfence rent arrears that have built up in specific periods in which a business has had to remain closed during the pandemic, with consideration for the restrictions on specific sectors. Landlords and tenants will be required to come to an agreement on the treatment of those ringfenced arrears, for example, waiving some of the amount due or agreeing a longer-term repayment plan. If agreement cannot be reached, a binding arbitration process will be put in place that ensures a legally binding agreement is made to which both parties must adhere. It is the government’s expectation that landlords should share the financial burden with tenants where they are able to do so and give tenants breathing space to agree new terms, but also that tenants who can pay, should pay.
The government plans to implement the legislation and publish a revised Code of Practice before 25 March 2022 setting out the principles they expect parties and arbitrators to adhere to.
The 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.
On 25 April, the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 came into effect and impose temporary restrictions on enforcement by landlords. A minimum amount of 554 days' unpaid rent must be outstanding before CRAR can take place.
On 25 June 2020, the Corporate Insolvency and Governance Bill was granted Royal Assent. Part of the Bill’s intention is to provide additional protection to retail tenants.
The rules on winding up petitions affect all petitions that are either based on a statutory demand served or presented to court between 1 March 2020 and 30 June 2021. 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.
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 continue to evolve. It may be the case that the prospect of finding a new tenant may be limited. 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 once the restrictions are lifted, 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. 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.
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 may 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 a liability for compensation and costs to their tenant.
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.
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 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 continuing uncertainty, taking steps to understand your options so that you can make an informed decision and/or make adequate preparations is vital.