The introduction of the Coronavirus Act 2020 (CVA 2020) placed express protections for business tenancies that in turn significantly restricted landlords ability to take enforcement action against a tenant who was in rent arrears. The government have now announced that the prohibition on landlords are to be extended again, for example the restrictions on landlord ability to forfeit a lease for non-payment of rent will remain in place until March 2022.
What options are available to Landlords who wish to recover rent arrears from tenants?
Binding Arbitration Process
The Government have announced that they will introduce primary legislation that will ringfence rent arrears that have built up in specific periods in which a business has had to remain closed during the pandemic. Landlords and tenants will seek to come to an agreement on those ringfenced arrears but if agreement cannot be reached, a binding arbitration process will be put in place. This will result in a legally binding agreement is made to which both parties must adhere.
Debt Proceedings
There are currently no restrictions on landlords issuing claims in either the county courts or the High Court to recover arrears of rent from tenants. Where the lease does not allow the tenant to exercise a right of set-off, deduction or counterclaim in respect of rent payments, it may, be possible for a landlord to seek ‘summary judgment’ on its claim. Summary judgment is a means of applying for a determination of a claim where the defendant has no real prospect of defending the claim and there is no other compelling reason why the claim should proceed to trial.
A rent arrears claim and an application for summary judgment on that claim is usually determined in less than six months and is less expensive that a full trial. The general rule on costs in litigation is that costs “follow the event” – i.e., the winning party is awarded a proportion of its costs and the losing party has to pay them, so in any such claim a landlord, if successful, should be able to recover a proportion of its costs from the tenant, subject, of course, to the tenant’s solvency and ability to satisfy any order made against it.
The issue is that even if a landlord obtains an Order against the tenant for rent arrears, the restrictions on statutory demands and winding up petitions remain; making it very difficult to actually enforce the terms of the Order but in circumstances where a tenant is able to pay it may be an effective tool to effect payment.
Commercial Rent Arrears Recovery (CRAR)
The CRAR is a statutory procedure, which allows landlords of commercial premises to recover rent arrears by taking control of the tenants goods and selling them.
If the rent has been outstanding for 554 the Landlord is still permitted to use the CRAR.
Forfeiture
The CVA 2020 expressly prohibits forfeiture of a commercial lease by a landlord for non-payment of rent. As this prohibition only applies to forfeiture on the basis of non-payment of rent, if a landlord has a right of forfeiture on any other grounds, it could still exercise this right.
Recovery from Existing Guarantors
Where the existing tenant’s obligations are guaranteed by a third-party guarantor, a landlord may be able to recover rent arrears or other sums due under the lease from the guarantor. A landlord should check the wording of the guarantee carefully to see whether liability has been triggered, what steps must be taken and what options the landlord has under the guarantee.
Rent Deposits
Many commercial leases require the tenant to pay a rent deposit. There are no coronavirus-related restrictions on recourse to a rent deposit. However, the government code of practice suggests that Landlords draw down on rent deposits if it is on the understanding that they will not require them to be topped up before it is “realistic and reasonable” to do so. Whether a landlord is able to draw down on the deposit will depend on various matters including most importantly the terms of the deed governing the deposit and how the deposit is held.
Landlords should also be aware that where a tenant is in administration, rent and other sums may be payable by the administrator as an expense of the administration and rank in precedence to claims of other unsecured creditors. If a landlord draws down on a rent deposit, the administrator will not be subject to any obligation under the deposit deed to ‘top up’ the deposit following the landlords withdrawal. It may, therefore, be better to preserve the deposit to meet other potential claims, which do not qualify as expenses of the administration.
Statutory Demands
Statutory demands can still be served but unless a winding up petition can then be presented, (see below) they are unlikely to have significant effect.
Winding-Up Petitions Still Possible
It is still possible to present winding-up petitions if the creditor is able to show reasonable grounds for believing that coronavirus has not had a financial effect on the tenant company or that the tenant company would have been unable to pay its debts regardless of the financial effect of coronavirus. It is, however, very difficult in practice to argue this for any debts that pre-date the pandemic. These restrictions will remain in place for a further three months from 16th June 2021.
Rent and Other Sums Due Under Lease as Expense of an Administration
Where tenants are in administration, rent and other sums due under the lease are payable as an expense of the administration and, therefore, ahead of other creditors where the premises are used for the benefit of the administration e.g. where the tenant continues to operate its business from the premises because it is being sold, stock is being sold or the business is winding down. Where premises have to close due to the coronavirus it is not clear whether rent will still be an expense of the administration.
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