Covid-19 – Commercial Landlord – Rent Recovery Options

Following the restraints placed upon commercial landlords being extended again, what has been a difficult year for all has been especially difficult for landlords of commercial properties where rents have often gone unpaid.

Whilst a code of practice for commercial landlords and tenants was published by the Government with a view to assisting those difficulties, the code is optional as opposed to obligatory, and has still left many landlords wondering how best to deal with their commercial leases. This article outlines the options available.

Landlord restrictions

• The introduction of the Coronavirus Act 2020 has prevented a commercial landlord from undertaking forfeiture of a lease (for non-payment of rent) until 31st March 2021;
• The Corporate Insolvency and Governance Act 2020 has similarly restricted the ability to serve a statutory demand, and thereafter to issue a winding up petition, until 31st March 2021. The Act has indeed restricted the ability to serve a winding up petition against any commercial entity unless it can be shown to the satisfaction of the Court that Covid-19 has not had a financial impact upon the debtor. That in itself is a significant hurdle to meet in the current economic climate;
• CRAR – The Taking Control of Goods and Certification of Enforcement Agent (Amendment) (Coronavirus) Regulations 2020 have prevented the use of Commercial Rent Arrears Recovery (CRAR) unless at least 276 days’ rent is outstanding from the tenant, and that sum will rise to 366 days’ rent from 25th December 2020, being the next quarter date.

So with the inception of these various Covid-19 restrictions, what debt recovery options do commercial landlords have in practice?

Debt claims and Court proceedings

Landlords continue to have the right to issue Court claims in respect of all rent (and other monetary sums) owed within the lease.  Whilst this does not in itself result in the premises being recovered from the tenant, it does give clarity as to the level of debt owed to the landlord, if it were needed.

Indeed, where a tenant’s lease incorporates any clause preventing a set off, those Court proceedings are highly likely to be successful alongside a recovery of legal costs incurred.

Forfeiture for breach of other lease covenants

Whilst forfeiture for rent arrears is currently prohibited, the same cannot be said for other covenants contained in a lease. If those covenants are breached then forfeiture is currently permitted. This may include obligations such as the use of the premises being outside of that permitted, internal decorations in specified years not being undertaken, external works being ignored in breach of the lease requirements, or simply not allowing the landlord access for inspection.

If a tenant is in breach of other lease covenants, then the landlord should consider the service of a section 146 notice, compelling that which can be rectified to be done, within a reasonable period of time. If the tenant still fails to complete the actions complained of and does not dispute the contents of the notice and the issues complained of, then a landlord does have the right to forfeit.

Third party guarantees

One option often overlooked by a landlord is a third party guarantee provided at the outset of a lease. Whilst there are restrictions upon enforcement against a commercial tenant, that does not stop the rent liability accruing of course. If the landlord obtained a third party guarantee at the outset, then it is an entitlement of the landlord to pursue unpaid rental sums from the guarantor. A guarantee will often incorporate additional requirements which need to be met by the landlord, in terms of a process to be followed before the guarantor is liable for the debt, but if the due process is followed, a landlord can enforce a guarantee.

A close review of those terms with our specialist team will help to decipher whether a guarantee can be enforced.

Rent deposit deed

At the commencement of a lease, it is often the case that a rent deposit was provided by the incoming tenant. Whilst there will be provisions and conditions attached to that deposit, it may be that a landlord is entitled to draw down on that rent deposit to ease cash flow. Thereafter and once the restrictions are lifted in the New Year, a landlord will be entitled to request that the tenant reinstate the original value of the deposit.

The voluntary code of conduct states that landlords must be ‘reasonable and realistic’ with regards to the requirement and timeframe for the deposit to be reinstated but nonetheless it is an option available to landlords in the current circumstances.

CRAR

As noted above, whilst there are significant restrictions currently on the use of CRAR, it is available to landlords where the requirements can be met. The level of rent due from the tenant must equate to at least 276 days rent, and this sum will rise to 366 days’ rent after 25 December 2020. If those circumstances exist, CRAR remains a viable option.

It is important for commercial landlords to be aware that all is not lost and that there are options available to them. In these difficult times, where the financial reality of overdue and unpaid rent makes matters increasingly hard for landlords , there are processes available which perhaps have been overlooked or disregarded.

Undoubtedly communication with tenants is a key factor and the reality is that these restrictions will end in due course, whereupon tenants will be required to bring matters up to date. In the interim however, landlords should consider how the financial impact they are currently experiencing with unpaid rent, can successfully be recovered.