What landlords can do in relation to non-payment of rent

In relation to the majority of occupational leases in England and Wales, the obligation of the tenant to pay the annual rent and other sums falls due on four occasions during each year. The next one of those occasions will be on 24 June 2020. The experience of many landlords in relation to the previous occasion (which was on 25 March 2020) was that many tenants failed to pay the sums which were due. Given that this was at an early stage in the Covid-19 crisis, many landlords are concerned that the position in relation to the 24 June payments will be similar and could be worse.

The law in relation to non-payment of rent has developed extremely quickly during the Covid-19 crisis and there does not appear to be any slowing in the speed of that development. While it may be clear, it is perhaps worth making the point that all of the arrangements relating to rent payments involve deferral only of the tenant’s obligations and do not involve writing off payments which are due or will arise in the future. In summary, the current position is as follows.

• Postponement of the right of forfeiture for non-payment of rent
  
  Section 82 of the Coronavirus Act 2020 (the “Act”) postpones a landlord’s right to forfeit in respect of non-payment of rent by a tenant of business premises during the period which currently ends on 30 June 2020. It is important to note that this provision applies only to tenants and occupiers who are carrying on a business from the relevant property. Rent is broadly defined and includes not only annual rent but also service charges and insurance charges. Although there has not been any formal announcement or indication to this effect, it seems likely that the Secretary of State (or Welsh Minister in Wales) will extend the current expiry date of 30 June 2020 to a later date.

• Restrictions on the use of CRAR
  
  As a result of new legislation introduced on 25 April 2020, landlords are not able to use Commercial Rent Arrears Recovery (CRAR) unless the arrears of unpaid rent relate to a period of 90 days or more. The fact that the relevant arrears must be in respect of 90 days or more does give rise to the possibility that a well advised tenant may make a partial payment of the arrears in order to ensure that this protection is available.

• Possession Proceedings
  
  A Practice Direction has been in effect since 27 March 2020 and will cease to have effect on 30 October 2020. It provides that all proceedings for possession under CPR Part 55 and all proceedings to enforce an order for possession by warrant or writ are stayed for a period of 90 days from 27 March 2020. It does not apply to claims for injunctive relief.
• The Corporate Insolvency and Governance Bill (the “Bill”)
  
  This draft piece of legislation is currently making its way through the parliamentary process (notwithstanding the queuing!) and having passed through all stages of the House of Commons it appears likely that it will be brought into law possibly before the end of June. The Bill will make a number of important changes to insolvency and will have important implications for landlords and tenants. While it is possible that changes to the Bill could be made during the parliamentary process, the key elements of it will almost certainly be brought in.
  
  The key elements which landlords will need to be aware of and which will impact on any action they may take for non-payment of the June quarter rents are as follows:
  • Statutory demands and winding-up petitions. The Bill introduces temporary provisions intended to restrict the use of statutory demands followed by winding-up petitions against otherwise viable companies struggling because of Covid-19. Statutory demands served on tenants in the period between 1 March 2020 and one month after the Bill comes into force may not be used as the basis of a winding-up petition. Additionally, winding-up petitions may not be presented between 27 April 2020 and one month after the Bill comes into force (and those presented, and winding-up orders made, may be unwound by the court) unless the landlord has reasonable grounds to believe that the tenant’s inability to pay is not a result of Covid-19.
    
    Whilst this temporary relief in relation to winding-up is not restricted to tenants, it is, in part, motivated by a desire to prevent landlords alternatively petitioning for a tenant’s winding-up having been denied the right to forfeit the lease pursuant to the measure mentioned above.
  • A creditor’s moratorium. Companies which either are or are likely to become unable to pay their debts will be able to apply to court for a payment holiday in respect of any sums which either fell due before or which would fall due during the period of the payment holiday. The payment holiday is called a moratorium and will be for an initial period of 20 business days. This can be extended to 40 business days without the consent of the company’s creditors (which includes landlords) and further extensions can be given either through a court order or the agreement of creditors.
    
    While the moratorium is in place the company will only be required to pay the rent which falls due during that moratorium.
    
    The moratorium will provide tenants with the following protections.
  • A landlord may not forfeit a lease by peaceable re-entry.
  • The issue of a statutory demand or winding up petition is prohibited.
  • The commencement of legal proceedings to claim rent arrears that arose before the moratorium began is prohibited.
  • The enforcement of any security over the tenants’ property with limited exceptions is not permitted.
• What are the options that do remain available to landlords?
  

  Guarantees
  

  A landlord continues to be entitled to pursue any guarantor with liability in respect of the lease – this could be a guarantor of the tenant or the former tenant who provided an authorised guarantee agreement. This will be particularly useful if the relevant guarantor is a company or other entity that is ineligible for a moratorium (which may well be the case with overseas guarantors).

  Sub-tenants

  The possibility of a landlord pursuing sub-tenants by serving notice on them to pay rent directly to the landlord remains open (although depending on timing on service of the notice it may not offer protection for the June quarter but could assist in preserving the Q3 position).

  Interest

  None of the restrictions which are outlined in this note affect the tenant’s obligation to pay interest on unpaid sums where the relevant lease provides for this.

  Forfeiture on other grounds

  None of the restrictions on the landlord’s remedies introduced by the Act or the Bill prevent a landlord from pursuing forfeiture for reasons other than non-payment of rent. Leases will typically give the landlord the right to forfeit for any breach of covenant or if the tenant suffers an insolvency-related event. A landlord will be able to pursue court proceedings for forfeiture if there is a breach of covenant or the tenant has suffered insolvency but there is a risk that a court may be more willing to grant relief from that forfeiture in the current circumstances (although rights can be reserved to keep the claim alive for future action). It seems very unlikely that the grant of the moratorium under the Bill will be an insolvency event for this purpose.

  Rent deposits

  A landlord will continue to be able to draw on a rent deposit and to require the tenant to replenish the rent deposit account. What is less clear is whether a landlord will be able to draw on a rent deposit if the tenant has the benefit of a moratorium under the Bill. The restriction on the enforcement of any security over a tenant’s property may prevent a landlord from claiming a rent deposit: whether a landlord can claim will depend on the terms on which the deposit is held and whether it is a ‘Financial Collateral Arrangement’ under the Financial Collateral Regulations 2003. This has not been tested and has been the subject of contradictory views in a government consultation paper and various commentaries. Clearly, this is unsatisfactory and it would be very desirable if this could be clarified before the Bill completes the parliamentary process.

  Asset management opportunities

  We anticipate that landlords may use the rent or other arrears which have accrued as an opportunity for agreeing new arrangements with tenants such as granting rent free periods in return for lease renewals or reversionary leases or removing tenant break rights.

  Other stakeholders

  Landlords should ensure that in relation to any action that they are proposing to take that they have complied with the terms of any arrangements with their lenders to avoid the possibility of an inadvertent breach. In addition, it may be necessary for landlords to make appropriate notifications to their insurers.

Conclusion

This note provides a short summary of the position between landlords and tenants in an area of law which is changing quickly in response to the circumstances created by Covid-19. This note records the position as at 4 June 2020. It seems likely that the Bill will be brought in to law and will almost immediately be tested in respect of the rent payments due towards the end of June this year.

The government is currently working on a new code of conduct, one of the principal purposes of which is to support businesses on the high street and to give them comfort in relation to their rental liabilities. Although it appears that the code will be voluntary, any action which is taken which does not follow the code could of course give rise to reputational damage for a landlord. This will only add to what is already a complex situation.