14th April 2020
Covid-19 and the Commercial Landlord
What can a commercial Landlord do about a non-paying Tenant during the Coronavirus pandemic?
In response to Coronavirus, the Government has brought in new legislation in the form of the Coronavirus Act 2020 (‘the Act’). The Act has been put in place as an emergency measure to deal with the impact of the Coronavirus disease.
One of the measures under the Act prevents landlords from forfeiting a commercial lease for non-payment of rent until 30 June 2020 (subject to any extension).
Whilst these protective measures have been put in place, business tenants are still under an obligation to pay rent. It should be highlighted, that the legislation does not intend to suspend or reduce any rent owed. It remains payable and interest may be accruing on any unpaid sums due to any contractual provisions within the lease should be carefully considered.
If a commercial tenant fails to pay the rent due under the terms of the Lease, commercial landlords will need to consider alternative remedies against a tenant’s failure to pay rent.
Whilst the Act prevents forfeiture for a limited period, there is nothing in the Act to prevent commercial landlords from taking alternative steps to enforce a tenant’s failure to pay the rent due under the lease.
The options available to a commercial landlord include:
Draw down the arrears from a rent deposit
A rent deposit is an upfront payment provided by a tenant to its landlord at the beginning of the tenancy agreement as a form of security to ensure that the tenant performs its obligations under the lease.
If a tenant is unable to make their rent payments, landlords may decide to draw on the funds held in the rent deposit to cover the rent arrears. This option may be helpful as an efficient method of recovering the debt whilst preserving the landlord and tenant relationship. It should be noted that a drawdown from a rent deposit by a landlord could be an act that amounts to the landlord waiving its alternative right to forfeit the lease or exercise a landlord break clause.
Demand payment and thereafter issue Court proceedings to recover the rent
The Landlord may wish to issue a demand for payment and make it clear that County Court Proceedings will be issued on expiry of the deadline set in the demand in default of payment in full.
The demand for payment can be an effective tool, however court proceedings can be rejected in favour of other methods of recovery because they can be expensive, and it can take months to receive a hearing date, if there are any grounds to dispute the demand.
Pursue a guarantor or a former tenant
If a person or company has agreed to act as a guarantor for the tenant’s covenants under the lease, it is open to the landlord to consider pursuing them if the tenant is in arrears of rent.
A landlord may also, in certain circumstances, be able to claim against a former tenant of the premises.
Commercial Rent Arrears Recovery
Commercial Rent Arrears Recovery (CRAR) is a statutory process which allows a landlord to take control of the tenant’s goods and, if needs be, sell them. Depending on the nature of the business, a tenant’s stock may be its most valuable asset, and therefore a pressure point to ensure rents are paid. If not, the landlord can take and realise a tangible and certain asset rather than seek recovery from a tenant who may shortly be out of business.
However, at present, it would be difficult to exercise CRAR as the tenant’s premises are likely to be closed.
Serve a statutory demand and thereafter commence insolvency proceedings
The Landlord could proceed straight to winding up (liquidation) of the tenant on the basis that they are insolvent, as evidenced by the fact that they cannot pay debts as they fall due. A statutory demand is a formal demand for payment of the debt, which an insolvency court would rely on in order to make a winding up order if the debt is not paid.
This is an expensive route to go down for the Landlord, especially if the tenant is insolvent. However, if the tenant is not insolvent (and has other assets to protect), winding up is a serious threat and one likely to get the Tenant’s attention.
What to do next
How the landlord proceeds is dependent on the solvency of the tenant and whether the landlord wants to prioritise retaining possession. In the current climate, Landlords should also be mindful of the risk of being left with an empty property if a tenant is evicted.
The Landlord must also be careful not to risk a good business relationship in these difficult times and may wish to consider giving time to pay and/or allowing payments by instalments. The benefit of this is that if it does not lead to full payment of rent, the landlord’s right to forfeit the lease after 30 June 2020 is preserved.
The first course of action should be for both parties to attempt to achieve a sensible and reasonable compromise. Both parties will benefit by working together through this challenging period. We are also here to help.
If you have any queries concerning the above or would like advice on the available enforcement options, please contact Katie Holland on 01892 502359 or by email at kholland@bussmurton.co.uk