In the UK, the majority of commercial leases require tenants to make rent payments each quarter with the last quarter date falling on 25 March 2020.
If a tenant doesn’t pay within the period specified in the lease (normally 14 or 21 days), then a landlord would, in normal circumstance, be able to re-enter the property and forfeit the lease (also known as forfeiture or peaceable re-entry) by changing the locks if the lease allows this. However, following the outbreak of Covid-19, the normal rules no longer apply.
On 23 March 2020, the government announced measures to assist commercial tenants by issuing a forfeiture moratorium for commercial leases within the UK. This means that landlords will be unable to re-enter the property and forfeit the lease until 30 June 2020 (with the possibility of that date being extended).
Commercial landlords will not be deemed to lose or waive their right to forfeit the lease by anything to try to secure payment until the moratorium lifts on 30 June 2020, but this has left many asking what they can do to secure rent from a commercial tenant.
What Are the Options Available to Commercial Landlords?
Serve a Statutory Demand
A statutory demand is a formal demand for payment served by the landlord on the tenant. If the tenant fails to pay the debt, agree payment terms or challenge the statutory demand within a period of 21 days for a company or 18 days for an individual, then the landlord can file an application (known as a petition) to:
- Bankrupt an individual who owes £5,000 or more
- Wind-up a company owing £750 or more
When serving a statutory demand, close attention has to be paid for the requirements relating to the content of the demand, the type of form that must be used and the manner in which it is served on the tenant. Complying with these requirements is essential for the demand to be effective. More information can be found here.
However, there are potential drawbacks with serving a statutory demand and it should not be served as a means of threatening the tenant with no intention of filing a bankruptcy or a winding-up petition. In light of the likely financial difficulties many defaulting tenants are inevitably facing during the current lockdown, there is no guarantee that the money owed will be recovered even if the petition can be heard in court within a reasonable period of time.
Before serving a statutory demand, landlords should also be aware of mounting delays within the court system following the coronavirus pandemic. Some courts have temporarily ceased dealing with bankruptcy and winding-up petitions with existing hearings being adjourned for at least three months.
Getting an outcome, let alone a positive one, is likely to be a long process but serving the statutory demand on the tenant might just bring enough pressure to bear that the tenant discharges the arrears or agrees payment terms.
Commercial Rent Arrears Recovery (CRAR)
CRAR is a statutory procedure for landlords to recover rent arrears from commercial tenants by seizing goods (as well as tools and equipment worth more than £1,350). This procedure applies to all commercial tenancies, irrespective of whether the lease itself refers to the landlord’s right to use CRAR.
The landlord starts this process by giving the tenant seven days’ notice of the intention to use CRAR. Once the seven-day period has expired, certificated enforcement agents (a type of bailiff) may enter the property in order to secure or remove items.
The issue with a CRAR is that it only applies to the rent paid to occupy the property, VAT and any interest on the arrears but not service or insurance charges. In circumstances where these (or any other) payments are rolled together, only the proportion that is ‘reasonably attributable’ to the rent, VAT and interest can be recovered through this means.
There is, again, the recurring issue that this method does not guarantee recovery of all of the debt owed. Not only does office furniture and computing equipment have a very low resale value, aggressively seizing these items in the short-term might well cripple the tenant’s long-term ability to trade and to pay rent, cause an unwillingness to cooperate and ultimately reduce the money received during the term of the lease. If the property does contain any valuable options then it is possible that the tenant might remove these items during the seven-day notice period.
Negotiate
During this difficult period, it may well make sense to negotiate a settlement with the tenant. This has the benefit of being comparatively lower in cost than any the other options and gives some certainty to the landlord and tenant. Whilst the need to compromise will result in the landlord not receiving all of the money owed, the alternatives give no guarantee that any arrears will be recovered and costs are likely to be a lot higher.
How you negotiate and the compromise you offer will depend on a variety of factors including your current cash flow situation, the relationship you have with your tenant and the length of time left to run on the lease. If you are looking to initiate the statutory renewal procedure under the Landlord and Tenant Act 1954 to settle the terms of a new tenancy, then you will not be able to rely on the non-payment of rent until 30 June 2020 to oppose your tenant’s right to a new lease.
You could consider a payment plan, which enables the tenant to spread the cost of the rent over a more manageable period of time, offer a period of reduced rent or an extended rent-free period. It does, however, help keep a commercial tenant in place during the coronavirus outbreak.
If you want to record the terms of any compromise in writing then we can help you to draft a so-called side letter to prevent any misunderstandings and ensure that there are no disputes about the terms that have been agreed.
Landlords and tenants are facing a difficult times at the moment but if you are a landlord or tenant and want to discuss your options in more detail please call 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.