- Many rent recovery remedies are curtailed until 31 December 2020
- Landlords are increasingly applying to court to recover rent arrears
- Debt claims are largely incontestable, and court costs are added to judgement
- Most commercial leases contain a tenant's indemnity in respect of debt claims
- Consequences of court proceedings should be carefully considered by both parties before action
An application to court for the recovery of rent arrears used to be viewed as the least aggressive of options available to landlords, but as COVID-19 has changed the landscape in terms of traditional remedies, it has become the last tool left in the box where there is no possibility of a claim against a guarantor or rent deposit. UK government intervention has largely removed other significant rent recovery measures from the playbook until 31 December 2020, and the commercial letting market is now witnessing an increasing number of landlords looking to the court in pursuit of arrears.
The traditional routes to rent recovery, through the threat of forfeiture, the service of statutory demands and the serving of debt-related winding-up petitions, have effectively been closed to landlords since March/April 2020. These measures, together with temporary limitations on the use of Commercial Rent Arrears Recovery procedures, have offered tenants financial breathing space in a time of economic turmoil. With tenants facing an initial extensive lockdown, and the current month-long enforced closure of hospitality, leisure and non-essential retail premises, the government has sought to give tenants a fighting chance to survive the COVID-19 crisis without cancelling their debts. Further measures, through the introduction of a voluntary landlord and tenant Code of Practice, aim to encourage collaboration and co-operation in terms of rental payments and concessionary arrangements within a suggested framework.
However, the alignment of landlord and tenant interests is often difficult, and voluntary measures, however well-intentioned, have no real bite. Market reports of increased court applications by landlords, such as the owner of Westfield shopping centres, suggest that landlord sympathy is waning in the face of reduced rent recovery rates in Q2 and Q3, and concerns over tenants pursuing company voluntary arrangements to renegotiate rent, close premises and write off debt.
For landlords wishing to pursue rent arrears this year, the court process is a relatively straightforward option. Where the lease imposes an obligation to pay rent and limits rights of set-off, there is (usually) no real legal defence to non-payment. The majority of cases conclude before reaching trial, through an application for summary judgement and/or striking out.
An initial letter demanding payment of rent arrears must be sent to the tenant and, if the tenant fails to pay, the landlord can then apply for recovery through the county court, for which a fee is payable. The level of that fee, which is added to the judgement debt payable by the tenant, depends upon the value of the claim (and is capped at a flat fee of GBP 10,000 for claims in excess of GBP 200,000). Claims above GBP 100,000 are automatically referred to the high court.
The tenant has 14 days from service of court papers to file a 'service of acknowledgement', either accepting or defending (whether in whole or part) the claim, and:
- if defended, the tenant must serve its defence within a further 28 days. Notwithstanding, the landlord can normally request early or summary judgement in the absence of legal defence; and
- if undefended, or if the tenant fails to serve an acknowledgement of service, the landlord can seek default judgement for the full amount plus fixed costs.
An additional, nominal fee (currently GBP 255) is payable on application for summary judgement. Once paid, the court will list the application for a simple hearing, usually heard by telephone. The timeframe for such hearing, normally taking up to six months, will depend upon the court's turnaround times and any backlog of claims.
Where the tenant fails to pay following summary judgement, enforcement requires the issue of a court order, for which additional, though relatively nominal, fees are payable. Enforcement will generally be processed through the high court, and can take various means, including the obtaining of a charging order over the tenant's land or securities or a third party debt order against funds in the tenant's bank accounts, or the taking control of the tenant's goods.
Most commercial leases will contain a tenant's obligation to indemnify the landlord for costs and expenses resulting from an application to recover rent arrears. This will include not only the court's costs, but those of the landlord's advisers in connection with such claim.
Threatened court action may induce tenants to consider early settlement with a view to avoiding both additional costs and potential breach of banking arrangements. In weighing up their options, tenants will also need to consider both:
- any potential damage to reputation caused by a summary judgement, which could be prejudicial in future lettings (through tenant rejection or the imposition of additional security requirements); and
- the consequences of release of any commercially sensitive information contained in court documents in the public domain.
Though the court process is a simple one, the landlord's decision to enforce judgement through court action may not be. Adversely impacting tenant liquidity before it has the opportunity to trade its way out of difficulties may result in tenant insolvency and vacant premises without an obvious stream of tenants to fill the rental gap. In some contexts, the agreement of temporary rent concession arrangements may still present both landlords and tenants with the optimal strategy for surviving current economic pressures.
If you would like further advice on the matters raised in this alert, please do contact us.