Since the Covid-19 outbreak began, the Government has enacted numerous measures designed to help both individuals and businesses. Last week, it placed a halt on all commercial forfeitures until at least 30th June. This has shifted the balance of power significantly in favour of the tenant, who may seek to take advantage of the immunity from that most draconian of the landlord’s remedies.
Covid-19 moratorium on commercial evictions
On 25th March 2020, the Coronavirus Act 2020 (Act) received Royal Assent. Section 82(1) of the Act says:
“…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 ‘relevant period’ is explained in Section 82(12) to mean:
“…the period—
- beginning with the day after the day on which this Act is passed, and
(b) ending with 30th June 2020 or such later date as may be specified by the relevant national authority in regulations made by statutory instrument (and that power may be exercised on more than one occasion so as to further extend the period)…”
By virtue of the above, from 26th March 2020 commercial landlords (who have previously held the balance of power in the commercial relationship) cannot forfeit a business tenant’s lease (by either peaceful re-entry or by formal Court proceedings) until at least 30th June 2020.
The relevant period may be further extended by statutory instrument if so required and the loss of forfeiture rights without a clear reinstatement date will be a troubling prospect for most commercial landlords.
Since forfeiture has been entirely removed from the commercial landlord’s arsenal, what other options are open to them?
Statutory demand/winding up
Where the tenant fails to pay rent, the landlord could choose to serve a statutory demand and either petition for winding up if the tenant is a company or bankruptcy where the tenant is an individual. Where insolvency occurs, this usually (although not in all cases) brings the lease to an end and could therefore circumvent the moratorium contained within the Act.
The difficulty with the above though, is that the Courts have this week adjourned off all winding up and bankruptcy petitions until at least the end of June. Whilst there are currently no restrictions on issuing petitions, there may be little point in doing so if they cannot be heard. There is also a risk that issuing a petition where there are no cases being heard could be viewed as an abuse of process. A commercial landlord would have to review the current situation before making the decision to issue. Moreover, it may be that as the situation develops the Government may also issue a moratorium on insolvency proceedings generally.
The threat of a petition could, however, have an impact upon the tenant’s banking covenants so it is certainly worth considering. Having said that, there is no doubt that the banks will be required to play their part and will be put under considerable political pressure in the next few months. Their attitude to possible breaches of covenant might be very different in these strange times. High profile landlords who pursue tenants also face the risk of generating negative publicity.
Commercial rent arrears recovery
At present, a commercial landlord may instruct a certified bailiff to attend the business premises to recover rent that is more than seven days overdue under the Commercial Rent Arrears Recovery (CRAR) regime. If the rent is not paid, the bailiff has the right to remove goods and sell them to recover the rent owed.
However, due to the current Covid-19 restrictions on movement and the mass closure of business premises, this is unlikely to be a realistic option to commercial landlords whilst the UK remains in lock-down.
Rent deposits
If the landlord holds a rent deposit (and depending upon the terms on which it is held), it may be possible to utilise those sums to cover any rent and/or service charge arrears.
However, whereas this is likely to be beneficial to the landlord in the short term, once the deposit fund has been depleted, the landlord will be faced with the same issues.
Constructive communication
It is likely that commercial landlords and tenants will have already have had difficult conversations about how to navigate though this crisis together. Ultimately, however, regardless of how long the restrictions on forfeiture stay in place the tenant is still liable to pay rent to the landlord and the usual remedies will be available to the landlord once the effect of the crisis softens and the world reverts to some form of normality.
It may be therefore that communicating constructively with the tenant now and agreeing, say, a temporary rent reduction and/or a payment plan to pay down the arrears over time may help cash flow and “steady the ship” in the interim. However long the lock-down is in force for, it will take some time after the restrictions are lifted go get back to some form of normality. For this reason, the commercial landlord will have to make sound choices and weigh up the choice between a tenant paying “something” or empty premises paying “nothing” and incurring rates.
We shell keep you updated as to any changes that come in to force.
How can Nelsons help?
For more information regarding the subjects discussed in this article, please call a member of our expert Dispute Resolution team in Derby, Leicester or Nottingham on 0800 024 1976 or contact us via our online form.