The Commercial Rent Arrears Crisis: what can landlords do?
25 October 2021 by Joshua Perry
Since the COVID-19 pandemic was declared 19 months ago, the commercial property sector has faced extraordinary and unprecedented challenges. As mentioned in our previous blog, £6.4 billion in unpaid commercial rents has accumulated between March 2020 and August 2021. This not only shows the bleak position that tenants are facing, but also for landlords who rely heavily on the rent payments as a source of income.
The Coronavirus Act 2020 (CVA) contains express protections for business tenancies that restrict the landlord’s ability to forfeit a lease during the “Relevant Period”. The Relevant Period of the moratorium has applied since 26 March 2020 and has now been extended until 25 March 2022, or such later date as may be specified. This means that, whilst the moratorium is in place, a landlord will not be able to evict a tenant for non-payment of rent.
Whilst the extension of the moratorium has provided some much-needed breathing space for tenants; landlords have, in cases, suffered unjustifiably as a result. This is because some tenants have relied on this restriction and refused to pay its rents – despite remaining financially-stable throughout the moratorium period.
How can landlords respond? In fact, landlords do have options apart from waiting another five months before evicting their tenants. Alternative courses of action and their current effectiveness have been summarised below:
Commercial Rent Arrears Recovery (CRAR)
CRAR is an enforcement method for recovering rent arrears relating to commercial property. It allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to any principal rent arrears (i.e. not arrears relating to service charge, insurance rent or other sums due).
This remedy is only available in limited circumstances following the extension of the “Relevant Period” until March 2022 – in accordance with the CVA. Following the ease of lockdown trading restrictions in June 2021, CRAR may be used for arrears accumulating from the June 2021 quarter day and all future principal rents. In relation to arrears prior to this date, CRAR is only available if the net unpaid rent arrears is an amount equivalent to 554 days of rent or more. This effectively ring fences the arrears that accrued between March 2020 and June 2022, which has made CRAR a relatively ineffective method under current circumstances.
It is expected that the government will introduce a new binding arbitration scheme to deal specifically with the ring-fenced debt. Substantial detail is yet to be released on the arbitration scheme, but the government is aiming for the new legislation to be in place before March 2022.
Winding-up petitions and statutory demands
A statutory demand is a written demand for payment of a debt, which tends to be a popular option for landlords due to being quick and inexpensive to issue. It is also very effective in applying pressure on a tenant, as failure to comply with a statutory demand can be followed up by the issue of a winding-up petition.
The Corporate Insolvency and Governance Act 2020 (CIGA) restricts the presentation of winding-up petitions based upon a statutory demand or a tenant’s inability to pay its debts. As of 1 October 2021, however, this blanket restriction has been replaced with four limited conditions until at least 31 March 2022.
One of the conditions requires that the debt owed must be (a) for a liquidated amount; (b) must have fallen due for payment; and (c) cannot be an “excluded debt”. The definition of “excluded debt” refers to rent arrears that have accumulated as a result of financial difficulties related to COVID-19. Therefore, whilst statutory demands may now be presented by Landlords to their commercial tenants, it may be practically difficult to establish that non-payment of rent is un-related to the pandemic. Nevertheless, this poses an opportunity to force financially-cable tenants who are hiding behind the legislation to start paying its rents which, in turn, is in line with the “Code of Practice for commercial property relationships during the COVID-19 pandemic”.
Security for Payment: guarantees and rent deposits
A landlord remains entitled to pursue any guarantor that has provided a guarantee in relation to liabilities under a lease. This is a useful tool for landlords if the guarantor of the tenant (or former tenant in respect of an authorised guarantee agreement) is not protected by the moratorium. The terms of the guarantee must be reviewed carefully, as some guarantees may require the tenant to be pursued for non-payments of rent arrears first – which may not be possible at the moment. The CVA has not affected landlords drawing down from rent deposits and seeking top-ups from tenants as well. A landlord should, however, consider carefully when the best time is to utilise a rent deposit.
Traditionally, pursuing a court action tends to be a last resort for claimants. This is primarily due to the costs, uncertainty, lack of speediness and negative publicity attached. Nevertheless, this method also remains unrestricted for Landlords to pursue. This will be an effective remedy if there is no genuine dispute relating to whether rent arrears is rightfully owed, as shown by the summary judgement granted in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd on 28 September 2021.
Applying to the court to appoint an administrator for a tenant following unpaid rents is also unrestricted for landlords. Again, landlords should consider whether this is a feasible option compared to others – mainly due to the costs and complexity of the method.
If you are a landlord, and would require some guidance relating to your options for pursuing a commercial tenant for non-payment of rents, please do get in touch with our commercial property team on 01206 835316 or email [email protected]