The government has recently announced plans to extend the moratorium on evictions for non-payment of commercial rent - first introduced in March 2020 under the Coronavirus Act 2020 - to 25 March 2022. At the same time it has introduced legislation to extend the restrictions on statutory demands and winding-up petitions under the Corporate Insolvency and Governance Act 2020 (CIGA) to 30 September 2021.
In conjunction with these extensions, the government has promised to introduce an entirely new Act of Parliament to ring-fence pandemic arrears to give tenants breathing space to pay the astronomic amount of outstanding rent that has built up whilst businesses remained closed during the pandemic. If, as anticipated, the new rules will follow the model adopted in Australia, the legislation could force landlords to either agree long-term payment plans for those arrears, or waive them entirely. Or where agreements are not reached, parties will face binding arbitration to settle the matter.
So what does this all mean for commercial landlords and tenants now?
New approach, new legislation
The government’s announcement to bring in new legislation to deal with outstanding pandemic arrears is a bold move. The Code of Practice, which the government introduced last year to encourage parties to work together and resolve differences over rental and service charge arrears has been criticised by industry leaders for being “toothless” and was recently given short shrift by the courts too. So, it comes as little surprise that steps are now being taken to address this deficiency.
However, it is too early to assess the impact the government’s new approach will have. There is still no detail on how the pandemic arrears will be "ring-fenced" or how the arbitration process, being foisted upon parties in the absence of agreements being reached, will work in practice.
Legislation that directly interferes with parties’ contractual rights and obligations will need to be drafted very carefully and make allowances for different circumstances to ensure it achieves the aim of sharing the pain between landlords and tenants. Differentiation between sectors might be needed where some have been more impacted by closures than others. Defining what "closure" means for the purposes of "ring-fencing" could become an area of possible confusion, depending on the sector and type of businesses involved. Parameters will need to be set and defined clearly to allow arbitrators to come to decisions quickly and fairly. The legislation may also have an unexpected consequences for existing concession agreements where landlords or tenants might try to undo prior agreements if they think arbitration is likely to result in a better outcome.
Striking a balance
All ecosystems need to be finely balanced and the same is true of the commercial property world, where landlord and tenant relations have come under immense strain over the past year.
On the one hand, landlords have faced debts of over £6bn since March 2020, a third of which can be attributed to the retail sector alone. By the time the moratorium on evictions ends in March 2022, landlords will have encountered two years of restrictions. Further delays will only increase pressure from lender and investor communities who have their own interests to protect.
On the other hand, tenants have been unable to trade for months on end with huge holes appearing in their balance sheets, bringing businesses to their knees. Even if trade is possible once lockdown restrictions are eased again in July, it could still take many more months before tenants can start to plug the holes and get back on their own feet.
Any changes the government introduces now will need to respect the interests of both landlords and tenants alike, especially at a time when investment in commercial property from both domestic and international sources remains vital to the future health of the industry and wider economy as a whole.
Taking action now
With forfeiture for non-payment of rent kicked firmly into the long grass next year and CIGA restrictions still in play until the Autumn at least, there are still avenues a property owner might pursue now, especially if it has an appetite for taking back possession, or for calling in debts. These might include:
1. Debt proceedings
There is currently nothing to stop a commercial landlord from bringing debt proceedings at court for arrears owed under the lease, even where these relate to the pandemic.
The process of issuing is relatively straightforward. A landlord will first be expected to send the tenant a letter before action, setting out the legal basis of the claim and giving the tenant a reasonable time to pay up. If payment is not forthcoming, or the tenant does not otherwise come up with a good reason for not paying, a landlord may be minded to issue proceedings, which it can do on-line or at its local county court.
If the debt is technically owed and the tenant does not have a defence, the landlord is likely to either obtain judgment in default, or the court may be persuaded by the landlord to order payment without a trial if the tenant has no real prospect of defending the claim and there is no compelling reason to have the matter heard. Recently reported county court cases have seen tenants’ attempts to raise all manner of defences in the face of unpaid rent being rejected.
Whether the government’s plans to introduce mandatory arbitration under the new legislation will impact a landlord’s ability to pursue tenants in this way, remains to be seen, so there is a chance that the window of opportunity for landlords to bring these types of claims and enforce debts might be closing. Tenants (as well as any guarantors on the hook) should therefore be live the possibility that landlords will commence debt proceedings now, to avoid the uncertainty and potential delay that the new legislation might bring.
2. Forfeiture for non-rent related breaches
It might sound counter-intuitive in the current climate to seek possession, but some landlords are taking a longer-term view to managing their assets. Some are taking advantage of recent changes in planning law to either convert the building to a different use, or do something entirely different with the land. In either case, if the landlord needs possession to achieve this, it might begin to scrutinise the tenant’s behaviour very closely and take advantage of a breach of the lease where this relates to something other than non-payment of rent. A tenant could find itself facing eviction fairly quickly if a breach exists, the landlord follows the correct notice procedure and the tenant does not remedy the breach within a reasonable time.
The position might be more complicated if, by the time the landlord takes action against the tenant, it has already fallen into some form of insolvency. In that case our “five-point guide: recovering possession with tenants in administration” sets out the limitations on what a landlord can and cannot do in that situation. Conversely, if the tenant falls into liquidation, the landlord’s right to forfeit is largely unfettered by the liquidator and a liquidator will usually be keen to off-load the lease and disclaim interest in it. Disclaimer is a statutory right which allows a liquidator to unilaterally terminate onerous contracts like leases and essentially ends the tenant’s liabilities and obligations under the lease.
As insolvency has an impact on what a landlord can do, it will be keeping a close eye on the tenant’s solvency situation and if there are concerns about it, the landlord might start to think about taking steps to recover possession quickly, before its hands are tied by the insolvency practitioner. Also, if a landlord wishes to take advantage of the opportunity to forfeit, it will need to act quickly and carefully to avoid inadvertently waiving the right to forfeit.
3. Exercising contractual rights
If a tenant is keen to stay in occupation, this could be hampered by a landlord’s contractual right to break the lease, if one exists. As long as the lease is contracted out of the Landlord and Tenant Act 1954, serving notice to terminate and recovering possession once the break date passes would be relatively straightforward for a landlord to achieve. Similarly, if the lease is contracted out and is due to expire shortly, the tenant has no right to remain in occupation after the expiry date and the landlord can simply change the locks to recover possession.
The landlord’s ability to recover possession is more complex where the lease is not contracted out of the 1954 Act. In that case, a landlord will need to prove one of the statutory grounds for possession, for example re-development or own occupation. A well-advised tenant could use its right under the 1954 Act for a new lease to put the landlord to proof on the ground specified. If this happens, it could take anywhere between 12-24 months (or even longer in the case of an appeal) for a landlord to recover possession at court and, even then, there is no guarantee it will succeed. If it does, whilst the tenant will be required to vacate shortly after the matter is disposed of by the court, depending on the grounds relied on by the landlord, the tenant may at least be entitled to receive statutory compensation.
Markus Klempa