With many commercial tenants either ceasing rental payments altogether or seeking rent concessions in light of COVID-19, statistics for the 2020 March quarter show a significant drop in rental recovery, with predictions for even lower recovery levels for the June quarter. Not surprisingly, many landlords are now looking at their potential options to recover unpaid sums. Equally, tenants are asking if they should have greater protection from legal proceedings, given the unprecedented impact of COVID-19 government restrictions on their businesses.
The government's first step to protect tenants has been to temporarily remove the forfeiture option for landlords. Section 82 of the Coronavirus 2020 has introduced a moratorium on forfeiture for non-payment of rent from 25 March 2020 until at least 30 June 2020. For further detail, read our previous client alert here.
In addition to the legal moratorium, many landlords have taken the commercial decision to grant rent concessions on varying terms to tenants struggling with the repercussions on trade of COVID-19. Others, mindful of the impact on their own businesses, continue to pursue tenant arrears using the available rent recovery methods.
In response to pressure from industry groups, the government has now taken a further step to protect commercial tenants from the impact of COVID-19.
With an eye to "safeguarding the high street and millions of jobs by helping to protect them from permanent closure during this time", the Government has proposed the introduction of measures to restrict what many tenants view as aggressive recovery measures, in a bid to encourage landlords and investors to work collaboratively with businesses unable to pay their bills during the COVID-19 pandemic. These measures will take effect until 30 June 2020, but can be extended in line with any change to the forfeiture moratorium deadline.
The precise terms of the legislation are not yet known, but the Government's press release of 23 April 2020 sets out brief details of the proposals in relation to the following existing remedies:
Statutory demands and winding-up petitions - Where there is no dispute as to the amount of the tenant's debt, the landlord can serve a statutory demand for repayment on the tenant. If this remains unpaid after 21 days, and the amount of the debt exceeds certain thresholds, this may be deemed evidence of inability to pay a debt and constitute grounds to present a bankruptcy or winding up petition against the tenant.
The government proposes temporarily to ban the use of statutory demands and winding up orders where a company "cannot pay their bills due to coronavirus". This temporary ban will apply to the use of:
- statutory demands made between 1 March 2020 and 30 June 2020; and
- winding-up petitions presented between 27 April 2020 and 30 June 2020.
Commercial Rent Arrears Recovery (CRAR) - this is a statutory procedure allowing landlords of commercial premises to recover principal rent arrears from a tenant in actual occupation of the property by taking control of the tenant's goods and selling them. Once a compulsory seven-day notice period has expired, certificated enforcement agents may enter the property (through an open or unlocked door) in order to seize goods.
The government proposes secondary legislation preventing landlords using CRAR unless they are owed at least 90 days' unpaid rent.
Whilst the government has stated that its aim is to provide breathing room to tenants "under strain", the detail of these legislative measures remains unclear at this stage. Will it apply only to those tenants in proven financial difficulty as a result of coronavirus, in which case how will the financial difficulty be measured and attributed? Or will it apply to all business tenants, even those with the means to pay (which would be consistent with the application of the forfeiture moratorium)?
The Government has called on tenants to "pay rent where they can afford it or what they can in recognition of the strains felt by commercial landlords too", but whether this will be a legal requirement or merely a statement of intent remains to be seen.
If you have any questions on the matters raised in this alert, please do contact us for further advice.