How does the Moratorium on Commercial Lease Forfeiture impact a Landlord?
Whilst we have seen plenty of information and protection for tenants during the pandemic with an extended moratorium procedure, Landlords are currently restricted on their normal defences against unpaid rent. For example:
Commercial Rent Arrears Recovery scheme (CRAR)
- Under normal circumstances a landlord can pursue rental arrears under the Commercial Rent Arrears Recovery scheme (CRAR) or by way of Statutory Demand. CRAR allows for seizure and sale of a tenant’s goods to recover arrears. It applies to principal rent, interest and VAT on that rent, but does not apply to service charge or insurance rent. Whilst this may seem an attractive option from 25 December 2020 to 31 March 2021, CRAR will only be exercisable if at least 366 days’ rent is overdue. By the time rent is overdue for 366 days, we may have emerged from the pandemic and other options may be available once more.
A Statutory Demand
- A statutory demand is a formal written demand for payment of a debt and if you are served with a statutory demand you have 21 days to comply. If the demand is not complied with, this can be used as grounds to present a winding-up petition. The Corporate Insolvency and Governance Act 2020 prohibits the presentation of a winding up petition based on a statutory demand served between 1 March 2020 and 31 March 2021.
- Another option usually open to a landlord is forfeiture. This too is affected by the recent extension of the Coronavirus Act 2020 which prevents forfeiture for non-payment of rent until 31 March 2021. Any action by a landlord during that period will not result in a waiver of the right to forfeit for non-payment for rent unless it is express and in writing. The right to forfeit will be available once the restriction has been lifted. You will be relieved to hear, if the tenant is in breach of other covenants in the lease rights to forfeit remains unaffected.
Issue Court Proceedings
- Landlords can issue court proceedings to recover sums due under the lease as a debt. This method is not caught by the restrictions affecting forfeiture, CRAR and statutory demands but debt recovery can be protracted and expensive. There are also likely to be additional challenges to this method as a result of the continued “lockdown” restrictions.
So, as a landlord what are your options before 31 March 2021?
Whilst the above information provides a gloomy outlook, the positive spin is the restrictions and challenges do not remove or reduce a tenant’s obligation to pay monies due under the terms of the lease. They are simply deferring the obligations of tenants and the opportunity to enforce payments.
Whilst the above will obviously give a degree of comfort, if action is required prior to 31 March 2021 Landlords have the following options:
- A landlord can still apply interest on late payment of monies due under the lease. This has not been affected and interest (usually) accrues on late payments. Again, whilst you may not be able to recover the monies in the short term, interest is accruing.
- Depending on the terms of the rent deposit deed, it is generally possible to draw down on a rent deposit where monies are due. Whilst this will alleviate some pressure temporarily it will be difficult to enforce any obligation on a tenant to replace the amount withdrawn by a landlord.
- If there is a guarantor a landlord is free to seek payment of rent (and other sums due) from a guarantor directly, but again this is difficult to enforce. Whilst the Government has announced its intention to review the commercial landlord and tenant legislation (Landlord and Tenant Act 1954) and consider the impact of COVID-19 on the property market in general, none of the current measures in place remove the obligation to pay rent (and any other money) due under a lease.
For a landlord it is a question of waiting and hoping their tenants survive the next few months and, once the restrictions are lifted, having conversations as to how any monies owed can be repaid.
If you are a landlord and would like to discuss any of the above, please contact Craig Burton or Elise Sherwell.