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Rent Arrears Recovery: Considerations for Landlords and Tenants

As the pandemic continues to affect the economy and businesses, the government has introduced a number of measures for commercial and residential tenants.  Forfeiture Section 82 of the Coronavirus Act 2020 (‘the Act’) is intended Read more...

Sona Shah

Trainee Solicitor

Litigation, Secured Lending and Commercial

As the pandemic continues to affect the economy and businesses, the government has introduced a number of measures for commercial and residential tenants. 

Forfeiture

Section 82 of the Coronavirus Act 2020 (‘the Act’) is intended to provide protection for commercial tenants by temporarily preventing a landlord from enforcing rights of forfeiture or re-entry (by proceedings or by peaceable re-entry) for non-payment of rent until 30 September 2020. The legislation, which came into force on 25 March 2020 and subsequently extended by Business Tenancies (Protection from Forfeiture: Relevant Period) (Coronavirus) (England) Regulations 2020 (SI 2020/602), does not waive or defer a tenant’s obligation to pay rent under a commercial lease; it simply provides some short-term relief.

Under the Act, rent is defined as any sum a tenant is liable to pay under a relevant business tenancy. This includes service charge, insurance payments, interest and other payments due under the lease. The moratorium will apply to all business tenants as defined in Part 2 of the Landlord and Tenant Act 1954. It excludes contractual arrangements which do not grant exclusive possession, tenancies at will and short leases of six months or less (except where the lease contains a right to renew beyond six months, or where a period of prior occupation together with the lease terms exceeds 12 months).

CRAR

The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 (‘the Regulations’) amends the right of landlords to levy Commercial Rent Arrears Recovery (‘CRAR’) during COVID-19. Landlords are prevented from using CRAR unless a sum equivalent to 189 days’ rent (previously 90 days’) is outstanding. This restriction also now applies until 30 September 2020. For these purposes, rent only includes the charge for use, occupation and interest, service charge and insurance premiums are not included. The Regulations allow a tenant to gain temporary protection from CRAR by reducing arrears below 189 days of rent. 

Statutory demands 

The Corporate Insolvency and Governance Act 2020 (“the CIGA”) provides further breathing space for tenants. Key provisions include:

  1. Prohibition on the use of statutory demands between 1 March 2020 and 30 September 2020.
  2. No winding up petitions can be presented on or after 27 April 2020 on the ground that a company had failed to satisfy a statutory demand served during the period 1 March 2020 to 30 September 2020
  3. No winding up petitions can be presented from 27 April 2020 until 30 September 2020 by a creditor on the basis that a company is unable to pay its debts as they fell due unless a creditor has reasonable grounds for believing that coronavirus has not worsened the debtor’s financial position or the debtor could not have paid its debts even if there had been no such worsening of its financial position.

The Code of Practice

The government has published a new voluntary Code of Practice for commercial property relationships during the pandemic. It is intended to support landlords and tenants to negotiate affordable rental agreements. There are four key principles: transparency and collaboration, a unified approach, acknowledgement of government supported subsidies or reliefs and acting reasonably and responsibly.

Considerations for Tenants 

  1. These protections do not act so as to write off any rent payable by tenants under their leases. Therefore, tenants are encouraged to continue to pay rent and any other sums due under the lease. 
  2. If tenants are not able to pay, they should seek a financial arrangement with their landlords to pay off the remaining sums as soon as possible. This will lessen the financial hardship but also ease the impact of repaying arrears and additional interest payments alongside ongoing rental payments. 

Considerations for Landlords

  1. Landlords should support their tenants where reasonably possible whilst also having regard to their own financial commitments and fiduciary duties.
  2. A landlord may be able to recover rent arrears or other sums payable under the lease from a guarantor (or from previous tenants pursuant to an Authorised Guarantee Agreement or AGA). A landlord must review the guarantee to determine the options available, whether liability has been triggered and what steps must be taken. 
  3. Where landlords agree concessions with tenants for deferral or reduction in rent payments, they should ensure that any side letter/agreement outlining such arrangement makes provisions for those arrangements to be automatically terminated wherever a proposal for CVA is submitted to creditors of any tenant company to vote on. This will allow any vote on the CVA proposals to consider the full rent and other sums due under the lease.