Commercial Rent Moratorium

The pandemic has had a big impact on the property sector. Many tenants have been unable to pay their rent and some tenants who could pay elected not to and landlords, many of whom have liabilities to banks, have suffered as a result of their income stream being reduced.

In addition, the Coronavirus Act 2020 which became law on 25 March 2020 restricted the actions a landlord could take against their tenant to recover unpaid rent. The restrictions under the Coronavirus Act 2020 ended on 25 March 2022 and the Commercial Rent (Coronavirus) Act received Royal Assent on 25 March 2022.

We regularly advise landlords and tenants in relation to commercial rent arrears. Detailed below is the current position for each option available to the landlord to recover rent arrears and we have also mentioned what to expect going forwards as a result of the Commercial Rent (Coronavirus) Act.

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First Arbitration Award Made Under Commercial Rent (Coronavirus) Act 2022

The Commercial Rent (Coronavirus) Act (the Act) is a new piece of legislation drafted by the government to enable 'relief from payment of certain rent debts under business tenancies adversely affected by Coronavirus'. The Act came into force on 25 March 2022.

The Act allows rent arrears that fell due under certain tenancies to be 'ring-fenced' if they relate to periods of time during which the tenant's business was subject to mandatory COVID-19 closures. Landlords cannot reclaim these protected arrears through the usual means and instead must go through an arbitration process to split the cost fairly with the tenant.

The arbitration scheme applies in England and Wales, although other parts of the Commercial Rent (Coronavirus) Act apply to Scotland and Northern Ireland.

On 11 July 2022, Falcon Chambers Arbitration published its first Award finding that a jewellery retailer could not obtain relief under the Act for rent accruing under the lease of its registered office.

Background

In Signet Trading Limited (the Tenant) v (1) Fprop Offices (Nominee) 4 Limited and (2) Fprop Offices (Nominee) 5 Limited (the Landlord), the Tenant applied for relief from payment of rent arrears for its registered office in Borehamwood, Hertfordshire.  

The Tenant and its subsidiaries occupied approximately 450 retail premises across the UK, selling jewellery and watches and providing associated services such as ear piercing. On 23 March 2022, due to the pandemic, the Tenant closed all retail outlets.

The premises to which the dispute related was the Tenant's registered office (the Office), which was used entirely as office premises. The staff from the Office were required to work from home. The majority of staff were placed on furlough and only 35 members of staff from the Office worked from home during the pandemic with only 2 members of staff on site.

The question, in this case, was whether or not the tenancy for the office premises was adversely affected by coronavirus and whether the rent payable was deemed to be protected rent under the Act.  

The Act sets out that rent is protected if the tenancy was adversely affected by coronavirus (i.e. the premises were required to close), and the rent is attributable to a period within the protected period.

The Decision

The Arbitrator found that the business carried on by the Tenant at the Office was not subject to a closure requirement. The Act focuses on premises that were required to close by law, which in the case of retail meant the shops, not the offices. This meant that the rent was not deemed to be protected rent.

The decision is important as it may stop tenants from relying upon the Act as a way of securing relief from rent arrears relating to office premises.

Options available to landlords in relation to the recovery of non ring fenced arrears from tenants and guarantors - 12th April 2022

Option 1 - Forfeiture

  • After 25 March 2022, a landlord can forfeit a lease for any arrears which accrued outside of the “protected period” prescribed by the Coronavirus restrictions (“non ring fenced arrears”). This will mean that a landlord can forfeit for non-payment of the September and December 2021 quarters, and any future quarters from the 25 March 2022. Similarly, a landlord can forfeit for non-payment of monthly rents which became due after the mandatory closure end dates.
  • A landlord can forfeit for non-payment of rent by either re-entering the property (known as peaceable re-entry) or by issuing court proceedings.

Key considerations:

  • A landlord must make an election to forfeit. This means that if the landlord wishes to forfeit for a failure to pay the previous quarter’s rent, they must ensure that they do not demand the subsequent quarter. If that quarter is demanded, the landlord will have waived its right to forfeit in relation to the previous quarters. The same principle applies in relation to monthly rents.
  • A tenant can apply to court for relief from forfeiture and/or a declaration that the lease has been wrongfully forfeited.
  • If the lease is forfeited there is a risk of a void period with the related rates liability.

Pros

Cons

Likely to obtain the tenant’s attention and may ultimately encourage the tenant to pay the rent in exchange for relief from forfeiture

Must make an election to forfeit and forgo demands/collection of rents/enforcement of other breaches

A quick and effective method of regaining control of the property

There is always a risk that the tenant could apply for relief from forfeiture

May be able to re-let to a new tenant at a higher rent, or alternatively redevelop

If no new tenant, there will be a void period in relation to rates liability insurance and utilities, and no income stream

 

Risk of squatters moving into an empty property

 

Landlord becomes involuntary bailee of any goods left at the premises

Option 2 - Commercial rent arrears recovery

  • The restrictions on the use of CRAR have now been lifted and landlords can now utilise CRAR to recover non ring fenced arrears.
  • CRAR allows landlords to seize a tenant’s assets at the demised premises to recover unpaid rent.
  • An enforcement agent must first serve a notice on the tenant – this must be given at least seven clear days before CRAR is exercised.
  • If the tenant fails to pay the rent in accordance with the notice the enforcement agent can enter the property and recover goods belonging to the tenant to the value of the unpaid rent.
  • Alternatively, the enforcement agent can enter into a “controlled goods agreement” with the tenant under which the tenant agrees not to dispose of the goods before the debt is paid. Ultimately the goods can be sold to satisfy the outstanding debt.

Key considerations:

  • At the outset, it is important to understand that if a landlord uses CRAR they will waive any right to forfeit that has arisen. Therefore if the landlord intends to recover possession they should seek legal advice before utilising CRAR.
  • CRAR can be used in respect of rents payable for possession and use of the premises. It cannot be used in relation to rates, council tax, services, repairs or insurance, even if those amounts are reserved as rent under the lease.
  • In order for CRAR to be exercised, there must be at least seven days of net unpaid rent. This net unpaid rent must exist both when the notice of enforcement is given and when control of goods is taken pursuant to that notice.

Pros

Cons

Enforcement agents’ fees paid by the tenant

Waives the right to forfeit in relation to that quarter

Tenant stays in the premises – no risk in terms of security/void periods

Monies from proceeds of sale may not cover the debt

Puts pressure on tenants to pay outstanding sums

The tenant may be unable to trade and may fall into further arrears

 

Cannot be used in relation to service charge

 

Risk of damages being awarded to the tenant if seized goods are damaged

Option 3 - Sub-tenants

  • Where a landlord has a right to recover rent from its tenant under CRAR, the landlord also has a right to recover from a subtenant. This may be a useful option if the undertenant is better placed to pay than the head tenant.
  • A landlord must serve a notice on the sub-tenant before the date on which the rent is due requiring it to pay rent directly to the superior landlord rather than to its own landlord to the extent of the arrears due. If the subtenant fails to comply with the notice the landlord can exercise CRAR against the subtenant.

Pros

Cons

Sub-tenants may be better placed to pay rent than thhead tenant

May make the tenant’s financial position worse if you take away income

Quick and cheap

Rent the sub-tenant pays may be less than the superior rent

 

Option 4 - Statutory demands and winding up petitions

  • Landlords have been entitled to serve statutory demands throughout the pandemic period. However, restrictions have been in place preventing landlords from presenting winding-up petitions in relation to debts that were unpaid due to the financial effects of the pandemic.
  • These restrictions were lifted on 31 March 2022 allowing landlords to issue winding up petitions in respect of non ring fenced arrears.

Pros

Cons

Threat of being made bankrupt or wound up puts pressure on tenant to pay the arrears

The debt must be undisputed or the tenant could have the statutory demand set aside

A relatively cheap and quick method of recovery if payment is received following service of a statutory demand

The cost of proceeding with a bankruptcy/winding up petition is expensive

 

The landlord will rank as an unsecured creditor in proceedings

Option 5 - Rent deposits

  • Whilst there were no coronavirus related restrictions on drawing down arrears of rent from a rent deposit, the government code of practice provided that the landlord could not pursue a tenant for a failure to “top up” a rent deposit.
  • This restriction was lifted on 25 March 2022, meaning that landlords can draw down and require the tenant to top up in respect of non ring fenced arrears.
  • In considering a draw down a landlord should seek advice regarding any notices which should be given to the tenant, and the implications of using a rent deposit where the tenant has entered into some form of insolvency (or insolvency is anticipated).

Pros

Cons

Sums recovered quickly and easily

If the Tenant is unable to replenish funds, the landlord is left with less security against other sums (such as dilapidations)

Option 6 - Former tenant or guarantor

  • A landlord should consider whether the non ring fenced arrears can be recovered from a former tenant or guarantor. This option has not been impacted by the coronavirus restrictions, but it is useful to recap its implications.
  • In order to pursue a former tenant or guarantor a “s.17” notice must be served with 6 months of the rent, service charge or other liquidated sums fall due. If the notice is not served within that timeframe the landlord will lose its right to pursue the former tenant or guarantor.
  • If the former tenant or guarantor pays the outstanding sums, they have a right to ask for an “overriding lease”, which will be inserted between the interests of the landlord and existing tenant (the existing tenant then becoming a sub-tenant). A landlord should therefore only serve a s.17 notice on the former tenant/guarantor if they are prepared to have them as a tenant.

Pros

Cons

Relatively quick and simple procedure

The original tenant/guarantor may not exist

 

Need to be happy with the former tenant as a direct tenant

 

Fresh notices must be served every 6 months

Option 7 - Existing guarantors

  • If the existing tenant’s obligations are guaranteed by a third party guarantor, a landlord can consider pursuing that guarantor if the terms of the guarantee allow.
  • Some guarantees only allow the guarantor to be pursued after a specified period, or if the tenant has already been pursued.

Pros

Cons

Potentially a quick method of recovery

Covenant strength considerations – tenant and guarantor may be closely connected and failure of one may affect the other, limiting the ability to recover

 

If arrears are not paid, the landlord will have to pursue a guarantor using another method of recovery

Option 8 - Court proceedings

  • Whilst ring-fenced debts will be subject to the arbitration scheme, non ring-fenced arrears can be recovered by issuing proceedings in the County Courts or High Courts.
  • In many cases relating to non ring-fenced arrears, there will be no real prospect of a tenant defending a claim, particularly in relation to principal rent. In such circumstances, a landlord may be able to make an application for summary judgment of the claim, which allows the claim to be determined within 6 months, rather than proceeding to a full trial.
  • Subject to the value of the debt, the landlord may also be able to recover the costs of litigation from the tenant.
  • However, landlords should bear in mind that even if they are successful in obtaining a judgment against a tenant, they will need to enforce that judgment (for example, by way of a charging order) in order to secure the sums due. This will incur further costs.

Pros

Cons

The tenant may be under pressure to avoid a CCJ – which may affect supplies

Can be costly and slow

 

Once a claim is issued it cannot be withdrawn unless the landlord pays the tenant’s costs

 

May not recover any sums even if receive judgment if the tenant has no assets against which you can enforce

Option 9 – Reach an agreement with the tenant

  • As an alternative to the options referred to above, landlords should consider reaching an agreement with the tenant with regards to non ring fenced arrears. This may reduce costs and go some way to preserving the landlord and tenant relationship.

Forms of agreement may include:

  • Agreeing on a payment plan
  • Accepting a rent concession. You should consider:
  • The impact on any guarantors
  • The impact on any successors in the title
  • Agreeing that you can market the property on the tenant’s behalf and (once a new tenant is found) agree on a surrender. You should consider:
  • SDLT implications
  • The impact on any guarantors

The Commercial Rent (Coronavirus) Bill (“the Bill”) - 7th March 2022

Published Monday 7th March 2022

What is the Bill?

The Commercial Rent (Coronavirus) Bill has been produced in draft form and is currently progressing through Parliament. It is expected to be enacted in March 2022 and whilst it may be subject to change, it gives us an idea as to what is being proposed and how commercial rent arrears that have accrued during the pandemic will be dealt with.

What arrears does the Bill apply to?

It applies to arrears of rent which includes rent for occupation of the property, service charge, interest, VAT and insurance. This is known as the ‘protected rent debt’.

What period does the Bill apply to?

It only applies to arrears that have arisen as a result of the mandatory closure ordered by the Government from:

  • 2pm on 21 March 2020 to 11:55pm on 18 July 2021 in England; and
  • 2pm on 21 March 2020 to 6am on 7 August 2021 in Wales.

This is known as the ‘protected period’.

The protected period will vary from business to business because it depends on the closure requirements for that business. For example, the closure requirements for hospitality and leisure were longer than for offices.

The protected period ends on the last day the business was subject to a closure requirement.

Does the Bill apply to all tenancies?

The Bill does not apply to all tenancies. It applies to business tenancies that Part 2 of the Landlord and Tenant Act 1954 applies to. Licences, for example, will not be impacted by the Bill.

Will the Bill prevent action from being taken by the landlord to recover the protected rent debt?

Yes, the following restrictions are likely to be put in place from the date the Bill is enacted until the last day the matter could be referred to arbitration (6 months from the Bill being enacted) or the day the arbitration is concluded:

  • The landlord will not be able to forfeit the lease for non-payment of a protected rent debt;
  • The landlord will not be able to present a winding-up petition against a business tenant or a bankruptcy petition against an individual tenant;
  • The landlord will not be able to utilise the Commercial Rent Arrears Recovery Scheme;
  • If Court proceedings are issued then either party can ask for them to be stayed; and
  • The landlord cannot draw down on a rent deposit. When a landlord has draw down on a rent deposit before the Bill is passed, the tenant will not be required to top up the deposit.

What are the current restrictions in place for protected rent debts until the Bill is passed?

The current restrictions are:

  • A landlord cannot forfeit a commercial lease for non-payment of rent until 25 March 2022;
  • No winding-up petitions can be presented against commercial tenants for arrears that are unpaid due to the financial impact of the coronavirus.
  • To use the Commercial Rent Arrears Recovery Scheme (“CRAR”), at least 554 days’ rent must be outstanding.
  • Whilst Court proceedings can be issued, either a landlord or tenant can ask for Court proceedings commenced after 10 November 2021 to stay.

What action can a landlord take before the Bill is enacted in respect of protected rent debts?

There are various steps a landlord can take before the Bill is passed. These are:

  • forfeit for breaches other than non-payment of rent if the landlord wants to recover possession.
  • pursue former tenants/guarantors who are liable for the debt.

What is the position for arrears that fall due before 21 March 2020 or after 19 July 2021 (in England) or 7 August 2021 (in Wales)?

Landlords can exercise their usual remedies for arrears that fell due before 21 March 2020 and after 18 July 2021 in England and 7 August 2021 in Wales.

Landlords can also exercise their usual remedies for businesses that were not forced to close as the Bill does not apply to them.

What happens if an agreement has already been reached in relation to a protected rent debt?

Any existing agreements that have been reached will not be affected by the Bill.

These arrears fall outside the scope of the Bill. A landlord can issue debt recovery proceedings in relation to these arrears. However, there are restrictions in place for other methods of enforcement.

Has the Bill introduced an arbitration scheme?

Yes, the Bill proposes to introduce a binding arbitration scheme. Either the landlord or tenant will be able to refer protected rent debts to arbitration within 6 months from the date of the Bill coming into force.

If neither party refers the matter to arbitration then it is likely that the opportunity will have passed and the usual methods of enforcement will be available to the landlord

What enforcement action can be taken to recover rent arrears that accrued during the pandemic before The Commercial Rent (Coronavirus) Bill comes into force? -7th March 2022

Published Monday 7th March 2022

A number of businesses were severely impacted by the pandemic, many had to close and a significant amount of rent arrears have accrued.

The Commercial Rent (Coronavirus) Bill has been drafted to deal with the arrears that accrued during the pandemic. It is expected to come into force at the end of March 2022. However, what enforcement action can a landlord take before this comes into force?

The options have been curtailed but we have set out below the current options available to a landlord.

Commercial Rent Arrears Recovery Scheme

In the current climate, many landlords across the country have tenants in their commercial properties who are in arrears of rent.

One option available to the landlord is to use the commercial rent arrears recovery scheme (“CRAR”) to recover the rent arrears provided the statutory requirements are met and the unpaid rent reaches the minimum threshold.

As a result of the pandemic, the landlord’s ability to use CRAR has been restricted. The landlord could use CRAR provided there was a minimum amount of unpaid rent (less interest or VAT and any deductions or set off) equal to seven days rent. However, this has now been increased to 554 days unpaid rent.

CRAR applies to tenancies (but not licences) of commercial premises provided the tenancy is in writing.

A landlord can only recover pure rent and cannot use CRAR to recover any other sums such as service charges or insurance rent. Where the rent payable under a lease is an all-inclusive rent (to include occupational rent, service charge and insurance rent), the occupation rent element will need to be identified and that is the sum which CRAR can be used to recover.

To use CRAR a landlord will need to instruct an enforcement agent. The enforcement agent will give the tenant notice (at least 7 clear days) before CRAR is exercised. Once the notice period has passed, the enforcement agent will either secure goods on the premises or remove them from the premises.

An enforcement agent can only exercise CRAR over goods that are on the premises, belong to the tenant of the premises, are situated in England and Wales and are not exempt. Exempt goods include items the tenant needs for their basic domestic needs and items for their personal use.

Once the enforcement agent has taken control of the items they can sell them. The notice must be given to the tenant before the items are sold. Once the items have been sold the proceeds of the sale can be used to satisfy the rent arrears.

Forfeiture

If the landlord wants to take back possession of the property then they may consider forfeiting the lease.

A landlord cannot forfeit a lease for non-payment of rent (which includes rent, insurance rent and service charge) until 25 March 2022 and is likely to continue to be suspended thereafter for arrears that fell due from 21 March 2020 to 18 July 2021 in England and 7 August 2021 in Wales.

Whilst a landlord’s right to forfeit a lease for non-payment of rent has been suspended. The tenant’s obligation to pay rent has not been suspended and the sums are still due and owing.

Whilst the landlord’s right to forfeit for non-payment of rent has been temporarily suspended, a landlord can forfeit a lease for other breaches provided they have not waived their right to do so and subject to the lease containing an express right to forfeit for such breaches. A section 146 notice will need to be served before forfeiture takes place allowing the tenant a reasonable period of time to remedy the breach.

Court Proceedings

Whilst Court proceedings can be issued to secure a County Court Judgement in respect of the rent arrears, either party can ask for them to be stayed if the arrears accrued from 21 March 2020 to 18 July 2021 in England and 7 August 2021 in Wales. Therefore, most landlords will not proceed with this option.

Action against guarantors

Quite often original leases will have guarantees in place, and on the assignment of leases which were entered into on or after 1 January 1996, Authorised Guarantee Agreements will have been obtained. In those circumstances, not alone can a landlord go against the tenant, but it can go against the guarantor.

In order to pursue valid claims against original tenants, previous tenants or guarantors under an authorised guarantee agreement there is a strict need for landlords to serve a “section 17 notice” within 6 months of the debt under the lease falling due, in order to preserve their rights to pursue original tenants, previous assignees and guarantors etc. for that debt.

If a landlord fails to do this within 6 months of a fixed charge under a lease falling due (to include rent and other fixed sums) then the landlord loses its ability to pursue those who have a retained liability to satisfy that debt in the event of a current tenant default.

Rent Deposits

A landlord may want to consider drawing down on a rent deposit. It is important to check whether the rent deposit allows the landlord to drawn down for unpaid rent. Most rent deposit deeds would allow it.

One the Commercial Rent (Coronavirus) Bill has been enacted, a landlord will not be able to draw down on a rent deposit for rent debts that fell due from 21 March 2020 to 18 July 2021 in England and 7 August 2021 in Wales.

Where a landlord has lawfully drawn down on a rent deposit before the Commercial Rent (Coronavirus) Bill has been enacted, the tenant will not be required to top up the deposit until after the last day the matter could be referred to arbitration or the day that the arbitration is concluded.

Commercial Rent (Coronavirus) Act: Everything Landlords and Tenants need to know!

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