The Coronavirus Act 2020 was given Royal Assent overnight on 25 March 2020 and contains provisions to protect business tenants from forfeiture.
Since March 2020 the Covid-19 pandemic has had a significant impact on businesses. In an effort to protect business tenants, the Government passed legislation in the form of the Coronavirus Act 2020 which contains protective measure preventing landlords’ ability to recover outstanding rents.
The restrictions imposed during the Covid-19 crisis on landlords’ remedies for recovery of sums due from tenants include:
- Forfeiture of commercial leases – the Government has extended the moratorium which has been in place since 25 March 2020 until 25 March 2022 for non-payment of any sums due under a commercial lease. A landlord is still permitted to forfeit in the usual way for other breaches of lease. The unpaid sums remain due and tenants are still expected to pay them and only an express waiver will waive the right to forfeit when the restricted period ends;
- Commercial Rent Arrears Recovery (CRAR) – landlords are currently restricted from using CRAR unless an amount of at least 554 days unpaid rent is outstanding. This restriction will also apply until 25 March 2022.
- Statutory demands and winding-up – landlords are prohibited in presenting a winding-up petition based on an unsatisfied statutory demand served between 1 March 2020 and 30 September 2021. A landlord is also unable to present a winding up petition between 27 April 2020 and 30 September 2021, unless it can show that the pandemic has not had any effect on the tenant’s financial position or the debt would have arisen in any event.
Despite these restrictions, a range of options remain available to landlords for non-payment of rent such as:
- Recovery from former tenants and their guarantors;
- Recovery from existing guarantors;
- Recovery from subtenants if a tenant has sub-let its premises;
- Commercial Rent Arrears Recovery (CRAR) to take control of the tenant’s goods;
- Rent Deposits;
- Debt proceedings for recovery of rent arrears; and
- Serving a statutory demand but no winding-up petition can now be presented for failure to make a payment of the sums demanded before 30 September 2021.
During the past year, landlords and tenants have been trying to make temporary concessionary arrangements about payment of rent that is acceptable to both parties. However, there are still many leases that remain in place without any agreements being made. As a result, it is expected that there will be many landlords taking enforcement action against their tenants over unpaid rents and other obligations not complied with, during the pandemic after expiry of the restricted period on 25 March 2022.
As a way of preventing litigation, the Government published a Code of Practice for landlords and tenants of commercial property across the UK back in June 2020 to guide landlords and tenants rent arrangements during the pandemic. The code is voluntary and its aim is to encourage landlords and tenants to work together where possible to reach agreements on outstanding debts which have accrued due to Covid-19 and the imposed lockdowns.
On 4 August 2021, the Government published a statement explaining that it will publish a revised Code of Practice which is to be used until legislation that is currently being drafted is passed. The Government will legislate to ringfence commercial rent accrued from March 2020 during the pandemic by businesses affected by enforced closures in order to protect jobs and give businesses breathing space to recover.
The Government expects landlords to make allowances for rent arrears accrued during periods of closure of many businesses and to share the impact with their tenants.
Landlords and tenants will be expected to reach mutually beneficial agreements for rent arrears with some suggestion that agreements could involve waiver of some arrears or agreed payment plans. Where negotiations fail between a landlord and tenant there will be a binding arbitration process in accordance with guidelines set out in the legislation.
Despite the protective measures in place for tenants who have suffered financially during the pandemic, two recent High Court decisions provide some encouragement for landlords by making it clear that Covid-19 is not a defence to tenants’ non-payment of commercial rent arrears and there is no legal restriction on a landlord’s ability to sue for rent arrears incurred during the Covid-19 pandemic. In both cases, despite the various defences put forward by the tenants, the Court awarded summary judgment in favour of the landlords even though the tenants were unable to trade during the pandemic.
Although tenants will be disappointed with the outcome of these cases, it does at least offer some certainty as to how the courts will deal with these type of claim, which may facilitate settlement between a landlord and tenant without the need to involve the courts.
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Correct at time of drafting (9 August 2021)