The Government has confirmed that it will be extending the temporary ban on commercial landlords issuing statutory demands and winding up petitions against commercial tenants who have not paid their rent during the COVID-19 pandemic. A statutory demand can be issued where a corporate debtor owes £750 to a creditor. If the debt is not paid within 21 days of the issue of the statutory demand, the landlord creditor can then issue a winding up petition against their tenant. Although in most cases a landlord does not ultimately want their tenant to be wound up (as that could lead to them having to take back the premises), the procedure is sometimes used to put pressure on tenants to pay their rent. Currently, any statutory demand served from 1 March 2020 and any winding up petition presented from 27 April that claims that the company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented or winding up orders made, where the company's inability to pay is the result of the COVID-19 pandemic. These measures were due to end on 30 September 2020, however the Government has announced that they will be extended until the end of the year (i.e. 31 December 2020).
Business Minister Lord Callanan said "it is vital that we continue to deliver certainty to businesses through this challenging time, which is why we are extending these important and necessary measures to protect companies from insolvency" and that "through this measure, we want to ensure businesses are able to not only come through this testing period, but also to plan, adapt and build back better".
This renewal of protection for tenants follows the Government's extension last week to the prohibition on landlords forfeiting commercial leases for non-payment of rent and restrictions on landlords using commercial rent arrears recovery (CRAR).
The Government's continued intervention means, in the short term, landlords find themselves with few options at their disposal to require payment of rents by their tenants. Landlords may therefore be obliged to consider those methods of recovery of rent which for the time being are not prohibited by Government measures. These may include:
- Payment agreements
Landlords can continue to engage with tenants to accommodate genuine requests to pay rent monthly rather than quarterly in advance, or rent deferrals (where rent is deferred for a specified period but will ultimately be paid) or agree, particularly in the retail sector, to change to turnover linked leases thereby sharing with the tenant the pain of the Covid lockdown. The tenant must also be willing to offer concessions- perhaps an extension to the lease term or removal of a tenant break. Any agreement should be formally documented to mitigate against the risk of any subsequent disputes. This is the ideal solution to preserve the client relationship.
- Using a rent deposit
Landlords must ensure that they comply with the provisions of the rent deposit deed and consider whether the rent deposit can be used for their particular claim and whether in any event it should be kept to cover the tenant's future liabilities, particularly those that may be more difficult to pursue than rent arrears (such as damages for dilapidations). Using a rent deposit is straightforward, in that it results in an immediate release of cash. However, less money will be available to cover any future liabilities under the lease should the tenant fail to replenish the deposit. Most deposit deeds require the tenant to top up the deposit if monies are removed from it but this may not put the tenant under any real pressure to comply with its lease obligations.
- Pursue guarantor or former tenant
A landlord may be able to look to former tenants or their guarantors for payment of rent. For leases dated after January 1996, a landlord can recover from an existing tenant and an assignor (and guarantor) under an authorised guarantee agreement (AGA) of the existing tenant. Recovery depends on the landlord serving notice under section 17 of the Landlord and Tenant (Covenants) Act 1995 within six months after the date on which the relevant sum becomes due. Any arrears that are older than six months cannot be pursued by way of a section 17 notice. It is, however, possible to serve a succession of section 17 notices, each relating to a different rent payment, so long as the notices are served within that six month time limit. If a former guarantor or tenant pays the arrears pursuant to a notice under section 17, it is entitled to ask the landlord for an overriding lease. The landlord must therefore consider whether it would be satisfied with the former tenant or guarantor as its direct tenant.
- Court proceedings to recover debt
A landlord can issue court proceedings against the tenant to recover rent or other sums due under the lease. The process can be expensive and prolonged. A court hearing will not be set for many months particularly with Covid causing ever greater scheduling difficulties and the tenant may not feel any real pressure to pay the arrears in the intervening period. However, in some cases in may be the landlord's only option.
In the current market place, we are seeing a large number of landlords and tenants engaging proactively to seek a joint approach to navigate the effects of the pandemic. However, it is clear, in the short term at least, that the extension of these and other Government measures, will continue to shift the balance of negotiating power between landlords and tenants.
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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.