A renewed ban on forfeiture
In March 2020 the Coronavirus Act 2020 was hastily passed into legislation and introduced various measures to protect commercial tenants as a response to the coronavirus pandemic.
The March Quarter rent was imminently due and the coronavirus “lockdown” caused many businesses to cease trading in the short term. Continuing to pay rent would have caused significant hardship on many and been impossible for others.
Section 82 of the Coronavirus Act was introduced to protect commercial tenants, by precluding commercial landlords from forfeiting commercial leases and evicting the tenant for non-payment of rent. The measure was initially in place until 30 June 2020 but it has since been extended a number of times, most recently for what is said to be ‘the final time’ to 31 March 2021. With the pandemic seemingly at its worst only time will tell whether that turns out to be the case.
Section 82(1) prevents re-entry or forfeiture for non-payment of “rent” during “the relevant period”, in respect of a “relevant business tenancy”.
Section 82(2) prevents any conduct by the landlord waiving the breach of non-payment of rent, short of an express agreement in writing by the landlord to waive the breach.
This means that until at least 31 March 2021:
- a landlord cannot forfeit a commercial lease for non-payment of rent;
- a landlord and tenant do not need to reach any agreement to waive payment of rent, it is automatic;
- a landlord does not need to fear waiving the breach, so does not need to cease communicating with the tenant, as would usually be the case.
After that date, the landlord will be free to enforce by way of forfeiture for the arrears of rent that have accrued throughout (or before) the relevant period. This is because The Coronavirus Act only defers payment of rent, it does not cancel liability. Any interest which falls due under a lease will continue to accrue.
What steps can currently be taken where a commercial property tenant fails to pay rent?
The Government issued a temporary “Code of Practice” for commercial landlord and tenants. The aim being to encourage everyone to act reasonably and responsibly. It has been endorsed by many and notably the RICS, British Property Federation and British Retail Consortium.
A tenant that can afford to pay should do so. However, many situations will be less clear cut and there are a range of options that a landlord can consider:
- Rent Deposits
Landlords can draw down on rent deposits in the usual way and that will also include the obligation on the tenant to ‘top up’.
A landlord can continue to pursue a guarantor for payment (subject to restrictions on enforcement).
- Break provisions
Leases may contain break provisions which can be exercised. The tenant may vacate if notice is served on them but they would still be contractually liable for all of the unpaid rent up until the break date. Serving a break notice could also be done as a negotiating tactic to agree new lease terms or force payment where you know the tenant wants to remain in occupation.
- Change the payment terms
A landlord and tenant could agree to part payment now with the remainder at a later date, or agree to smaller more regular payments (i.e. monthly rather than quarterly).
- Statutory Demand
The Corporate Insolvency and Governance Act 2020 prohibits the presentation of a winding up petition based on a statutory demand until 31 March 2021 where the company is unable to pay rent (or other sums falling due) because of coronavirus. This means that the teeth of a statutory demand have temporarily been removed. This does not apply to individuals and presentation of a bankruptcy petition is still allowed therefore this route will be more successful against an individual debtor.
- Forfeiture based on other grounds
Forfeiture is still available to a landlord for grounds other than non-payment of rent. For example, the breach of a repair covenant. A s146 notice would have to be served in the first instance.
- Debt claim
A normal debt claim can still be issued but it is unclear how quickly this will be processed by the court and whether or not summary judgment will be available against a tenant who is struggling as a result of the Coronavirus Pandemic or to a landlord that has ignored the Government’s temporary “Code of Practice” for commercial leases before issuing the claim. It is also possibly for a tenant to raise a counterclaim in reply, turning what was a simple money claim into something far more complex and time consuming. Of course, obtaining the court order does not guarantee payment and enforcement may still be necessary.
- CRAR (Commercial Rent Arrears Recovery)
Alandlord can seize goods to pay for principal rent, interest and VAT which is unpaid. However, the government has restricted the ability to exercise CRAR so that from 25 December 2020 it is only exercisable if 366 days rent is unpaid.
At the start of the pandemic the focus was on saving the tenant and keeping their business afloat but at some point the focus will need to move to the landlords – some who may not have received rent for 12 months and suffered financial hardship as a result.
In spite of this, it seems possible that at the end of March, rather than reversing the Coronavirus Act so that forfeiture is immediately available to all, the government will legislate to enable landlords to take action against those tenants with the highest arrears and providing some ongoing protection to those with lower levels (for example less than six months’ worth).