Andy Creer considers issues on forfeiture and waiver in respect of non-protected commercial rent debts, with the "relevant period" ending on the March quarter day.
The end of section 82 of Coronavirus Act 2020
As will be well-known to anyone in the commercial landlord and tenant sector, for almost two years, landlords have been unable to exercise a right of re-entry in respect of a business tenancy for non-payment of rent (section 82(1), Coronavirus Act 2020 (CVA 2020)), but have not had to worry whether their conduct might be regarded as waiving that right (section 82(2), CVA 2020).
The Commercial Rent (Coronavirus) Bill (Bill) is currently in the report stage in the House of Lords and due to be considered on 14 March 2022. While it is intended to introduce a compulsory arbitration scheme for "protected rent debt" where a tenancy was "adversely affected" by COVID-19, some rent arrears will fall outside of the scheme, for example:
- Where the tenant was already in arrears before 21 March 2020 (the start of the protected period).
- Where the arrears have accrued after the "protected period" in the Bill (that is, after 18 July 2021 in England and 7 August 2021 in Wales).
- Where the business or premises were not subject to a closure requirement in that protected period.
Consideration for landlords
As will be familiar to both landlords and tenants alike, the failure to pay rent is a "once and for all" breach, such that any subsequent affirmation of the lease with knowledge of that breach will waive the right to forfeit (London & County (A & D) Ltd v Wilfred Sportsman Ltd  1 CH 764).
Until the expiry of the relevant period on the March quarter day a commercial landlord can only waive a breach for non-payment of rent expressly in writing (section 82(2), CVA 2020). But what happens next?
After 25 March 2022, the common law position will be restored, and a landlord will not be able to accept rent on a "without prejudice" basis (Matthews v Smallwood  1 Ch 777). As the law currently stands (following Segal Securities Ltd v Thoseby  1 QB 887) the demand or acceptance of rent will waive the right to forfeit. (Some commentators have questioned whether this should be the case with a demand, but that is a debate for another day.)
Acceptance of the March quarter's rent after 25 March, when the section 82(2) of CVA 2020 exception will no longer apply, but before the right of re-entry arises (usually 14 or 21 days later) will waive the right to forfeit for historic arrears (and for other breaches). It will be an unequivocal election to treat the lease as continuing with knowledge of the breach.
If it had agreed a reduced rent for the duration of the CVA 2020, a landlord should consider whether to accept the payment after 25 March. If the tenant pays part of the March quarter rent after the quarter day, say on 26 March, acceptance of it will waive the right to forfeit for the earlier arrears, but will not waive the right in respect of the balance of the March quarter rent. The right of re-entry will not yet have arisen for the March quarter rent, so the landlord could still forfeit for the balance in due course.
So far so good: the landlord maintains its (albeit reduced) cashflow and has preserved its right of re-entry. But, following Neuberger LJ's obiter comments in Thomas v Ken Thomas Ltd  EWCA Civ 1504, the landlord may inadvertently have prejudiced its position in respect of the accrued arrears. In granting relief from forfeiture, the court is only entitled to require payment of the sums upon which the right to forfeit was based. If the right of re-entry in respect of historic arrears has been waived (as would be the case in this example where monies are accepted after the relevant period has ended, but a fresh right to forfeit arises 14 or 21 days after the March quarter day), then the tenant may be able to obtain relief by only paying the balance of the March quarter's rent and the landlord's costs on an indemnity basis unless the landlord has acted unreasonably. The landlord will be entitled to a money judgment for the debt but will have to rely on other means of enforcement for the historic arrears.
To be clear, in the ordinary course of events, Thomas v Ken Thomas Ltd does not allow a tenant to obtain relief simply by paying the rent for the latest period. It only applies where there has been waiver of an earlier right to forfeit for outstanding rent. As the landlord cannot re-enter to secure payment of those monies, it cannot seek their payment as a condition of relief.
While many landlords choose to place a complete rent stop on the account to avoid arguments on waiver altogether, a landlord can accept payment in respect of historic arrears (if expressly appropriated to this liability) without waiving the right to forfeit in respect of future rents. For example, payment of the September quarter's rent on say 1 February would not waive the right to forfeit which accrued in respect of the December quarter. The satisfaction of the outstanding debt does not amount to a recognition of the continuing lease. However, the acceptance of the September quarter's rent would waive the right to re-enter in respect of any breaches of other covenants in existence as at 29 September even if the landlord did not know of the breach at that time (see Faiz v Burnley BC  EWCA Civ 55).
The other protections afforded to tenants during COVID times are also coming to an end: the restriction on CRAR where less than 18 months' arrears have accrued also finishes on 25 March, and the moratorium on presenting a winding-up petition for rent arrears introduced by the Corporate Insolvency and Governance Act 2020 ends on 31 March.
While protected rent debts will be subject to the moratorium (Part 3 of the Bill), tenants will be vulnerable to enforcement action in respect of non-protected rent debts. With that statutory safety net of section 82(2) of CVA 2020 gone, the use of CRAR after 25 March will waive the right of re-entry (Brar v Thirunavukkrasu  EWCA Civ 2032).
The end of the CVA 2020 is a key deadline for landlords owed non-protected rent debts: elect to treat the lease as continuing or re-enter. If necessary, landlords should get advice now and, while section 82(2) of CVA 2020 is still in effect, seek to ascertain whether the tenant will be able to meet their obligations under the lease going forward. They should also ensure that their managing agents and/or debt recovery teams know exactly what to do (or not do) after 25 March 2022.
Acting for tenants
Tenants need to be clear what part of their rent arrears falls outside of the Bill (assuming the Act is enacted in the same terms). That is, how much of what they owe the landlord will be outside of the statutory arbitration scheme.
Normally, a tenant making payments toward historic arrears will appropriate the payment to the oldest outstanding rent in order to mitigate the accrual of (contractual) interest. Now, however, Schedule 2 of the Bill seeks to amend the landlord's right to appropriate if the tenant does not do so. A landlord receiving any payments during the moratorium period (six months after the Act comes in or up to the end of arbitration) must apply the payment to any unprotected rent debts first (paragraph 7). Payments previously received between the end of the protected period and the day before the Act is passed must be appropriated similarly (paragraph 8).
The Bill does not provide that the payment must be applied to the earliest unprotected rent debt. So a tenant may still wish to communicate with its landlord in advance of the payment being made that it is being tendered in respect of a specific liability; the most obvious being the oldest outstanding liability.
From a tenant's perspective, while the comments on relief in Thomas v Ken Thomas Ltd are usually to their advantage, it will be far less helpful when the relevant period in the CVA 2020 ends. Unless the landlord has expressly waived the right to re-enter for accrued rent arrears in writing, then the effect of section 82(2) of CVA 2020 will be to require the tenant to pay all the non-protected rent debts as a condition of gaining relief from forfeiture.
If they have not already done so, tenants should seek to negotiate a deal with their landlords for a temporary rent concession and/or a repayment schedule for the arrears. Landlords may continue to negotiate on a without prejudice basis, without waiving the right of re-entry (Re National Jazz Centre Ltd  38 EG 142).
Historically, courts have leant against forfeiture and granted relief where the tenant's breach can be remedied. While it is by no means guaranteed, there may be scope for persuading a county court judge to make an order for relief based on a repayment plan put forward by the tenant. The court has a discretion under section 138(3) of County Courts Act 1984 (CCA 1984) as to the date on which possession shall be given, it being not less than 4 weeks from the date of the order, and the court can extend the period at any time before possession is recovered (section 138(4), CCA 1984).
In Inntrepreneur Pub Co (CPC) v Langton  1 EGLR 34 Arden J noted that there was no fixed period which the court should specify under section 138(3) of the CCA 1984, and she was mindful that in exercising its discretion the court should have regard to the individual facts of the case. However, it was clear that any period for payment of the arrears: "must be one within the immediately foreseeable future so that the court can say with a sufficient degree of certainty that the rent outstanding will be paid". If there is evidence that the tenant can meet the payments in the proposed repayment plan, one can see a judge might have sympathy for a tenant in appropriate circumstances, especially where this would avoid the landlord obtaining a windfall from the lease being forfeit.
In reality, many landlords will not have changed their operating practices in light of section 82(2) of the CVA 2020, as the acceptance of rent would waive the right of re-entry in respect of other breaches of the lease. Nonetheless, as many tenants will have non-protected rent debts, the end of the CVA 2020 restrictions presents an opportunity for both parties to consider their positions and review their procedures.
Article first published for Practical Law in March 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.