As people are beginning to picture a post-lockdown Britain, many landlords and tenants will now begin to take stock on the past 12 weeks. Landlords will want to reclaim any lost income and tenants will be hoping that they have premises that they can return to.
Life after coronavirus lockdown – managing rent arrears
As an initial reaction to the coronavirus, the Government placed temporary restrictions on enforcement by landlords, including an increase of the minimum net unpaid rent (now an amount equivalent to 90 days’ rent) that must be outstanding before commercial rent arrears recovery could take place.
The Government has also announced that it will introduce further emergency measures to protect commercial tenants from enforcement action by landlords. This includes a temporary ban on the use of certain mechanisms where a company cannot pay its bills due to COVID-19.
Where a tenant fails to pay rent there are several remedies that the landlord can choose to pursue in order to recover payment. Often the remedy selected will depend on the context of the transaction. A landlord should weigh up whether they wish to regain possession of the property as a priority, whether they wish to regain the unpaid rent itself, or whether the landlord wishes to try to strike a balance between the two. As a landlord or a tenant, you may wish to consider the following with your solicitor:
- Are there any other breaches of the lease that also require remedy? Perhaps a failure to decorate or repair the property?
- Is this the first time that rent has fallen due?
- Is there a strong landlord and tenant relationship?
- Is the tenant likely to be able to pay the rent in the future or are they likely to go insolvent?
Often, a poorly executed rent recovery method can result in the unsuccessful pursuit of rent followed by a waiver of the right to forfeit the lease.
Options available to the landlord
Some of the options available to a landlord include:
- Payment agreements;
- Pursuit of guarantor;
- Utilisation of rent deposit;
- Court proceedings;
- Commercial Rent Arrears Recovery; and
- Statutory demands and insolvency proceedings.
1. Payment agreements
Following the end of the Government enforced coronavirus lockdown the tenant is likely to need time to pay back the rent arrears and a landlord may wish to consider entering into a payment agreement with the tenant.
This would require the tenant to pay the arrears in specified instalments over a specified period – for example, a single quarter’s outstanding rent could be spread across the next two quarters. This preserves the landlord and tenant relationship and also gives the tenant some time to resolve any financial issues it may have while ensuring that the rent arrears are repaid. Many tenants will also request to pay monthly rather than quarterly so that they can manage their cash flow more effectively.
A proactive landlord may wish to contact their solicitor and enter into negotiations with the tenant as quickly as possible in order to effectively manage any arrears.
Until 30th June 2020, a right of re-entry or forfeiture for non-payment of rent may not be enforced and no conduct on behalf of a landlord is to be regarded as waiving the right of re-entry. Assuming that the law reverts to its previous position, following 30th June 2020 a landlord could determine the lease and take possession of the property. For many, 30th June 2020 will be a deadline to agree any payment agreements.
3. Pursuit of a guarantor
If the lease has been guaranteed by a third party the landlord may pursue the guarantor or a former tenant for the rent arrears, though this should be reviewed with your solicitor to assess who may be liable.
4. Utilising a rent deposit
For many less well established tenants, the landlord may have required a rent deposit to be paid which often accounts for three months’ rent. The landlord may be able to draw down on this rent deposit in order to recover the rent arrears and demand that the tenant tops up the deposit, however, this will waive the landlord’s right to forfeit the lease.
5. Court proceedings
At present, Court proceedings are currently stayed until the end of June. Following this date, and assuming that the laws remain the same, the landlord could issue Court proceedings to recover the rent as a debt, however, this is a somewhat expensive and protracted process that many landlords will not choose as their first options.
6. Commercial Rent Arrears Recovery
Commercial Rent Arrears Recovery allows an enforcement agent to enter a property and recover rent arrears by taking control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears. This will need to be planned by your solicitor as it requires various notices to be served on a tenant by the enforcement agent and may be difficult to safely carry out in the short term unless adequate PPE is available.