Advice for landlords of commercial premises whose tenants are in rent arrears

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Due to the impact of COVID-19 on businesses across the country, new rules are now in place limiting the measures commercial landlords can take if their tenant is in rent arrears.

These new rules arise from recent Government legislation, the Coronavirus Act 2020 as well as Court rules, known as the Civil Procedure Rules or “CPR”. Although these rules exist to protect tenants whose income is affected by coronavirus that they are finding it increasingly difficult to pay their rent, they apply to all commercial tenancies equally.

Rules on the termination of leases

Under the Coronavirus Act 2020, landlords are no longer allowed to forfeit commercial leases if tenants fail to pay their rent. Forfeiture is the process by which a landlord can terminate a lease if a tenant breaches their contract. This can be achieved either by repossessing the property peaceably, or taking the case to Court. The ban on forfeiture will remain in effect from 26 March 2020 to 30 June 2020 (aka the ‘relevant period’) – although this could be extended should it be considered necessary.

This potentially enables tenants to remain in their premises until 30 June even if they can’t pay any, or some, of their rent. The difficulties of tenants who have suffered a loss of income could therefore be passed onto their landlords, meaning that the latter are also likely to suffer income loss.

Further changes were introduced in the form of a revision to the Corporate Insolvency and Governance Bill on 27 April 2020, which is now being fast-tracked through Parliament.

These aim to provide further protection for tenants whose landlords are pursuing overdue rent by alternative means, for example issuing a winding up petition to liquidate the tenant’s business due to non-payment, or seizing their goods under the Commercial Rent Arrears Recovery process (CRAR). The Bill therefore aims to fill in the gaps in current legislation protecting commercial tenants (i.e. the Coronavirus Act).

The new rules would affect winding up petitions presented to Court between 27 April 2020 and 30 June 2020. During this period, the Court will review any petition presented and reject it if the reason for non-payment is directly related to the COVID-19 crisis. Therefore, if the tenant was in rent arrears prior to the outbreak, it is likely the Court would issue the petition as the debt would be unrelated to coronavirus.

The new rules would also make changes to the CRAR procedure – until 30 June 2020, the tenant must be a full 90 days into rent arrears before it can be used (in practice, this is likely to mean a full quarter). Again, the government reserves the right to extend this deadline, and that relating to winding up petitions, if necessary.

Advice for those currently in the process of lease forfeiture

The Civil Procedure Rules (CPR) have been changed so that all ongoing Court cases for lease forfeiture have been suspended for 90 days (starting from 27 March 2020), meaning that landlords with cases currently in Court will not be granted an order for possession until at least 30 June 2020. If there is no extension to the ‘relevant period’, then landlords will, from 1 July, regain the right to forfeit their tenant’s lease for non-payment of rent, as well as being able to continue with any previously suspended Court claim.  There is expected to be a Court backlog however meaning that the actual date that an order is made could be significantly later than the lifting of the suspension.

Forfeiting a lease once the ‘relevant period’ has ended

It is anticipated that landlords and tenants will first seek to find an amicable way forward after the ‘relevant period’ rather than landlords rushing to forfeit leases.  This could include temporary rent reductions and payment deferrals.

Of course, not all landlords will have the ability to agree generous payment terms and will have their own costs, outgoings and liabilities to meet.

In all cases, it will be important for tenants to access the government support available during this period including furloughing of employees, business grants, rates holidays, VAT deferrals and additional finance via the Coronavirus Business Interruption Loan Scheme.

Darren Perks is a Partner at Tees, specialising in property related disputes.