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Commercial Rent Debt Update | FAQs

Commercial Rent Debt Update | FAQs

29 Sep 2021

Some of our commercial landlord and tenant clients have been anxiously awaiting news of developments in relation to the Government’s plans to support businesses with commercial rent debts.

Here are some answers to questions we are commonly asked by our commercial landlord and tenant clients:

 

Do tenants of commercial premises have to pay the rent stipulated in their leases while Government restrictions are in place?

Where rent provisions are contained in a lease, there is a contractual obligation on the tenant to pay the rent as stipulated in the lease subject to any provisions that enable the tenant to withhold rent. Specific legal advice should be sought in respect of the nature and effect of any such provisions in leases.

The statutory protections that have been put in place as a result of the Covid-19 pandemic do not give tenants a statutory right to discount their rental commitments under business leases. However, various protections have been put in place and some of which we consider below.

The Government has published a Code of Conduct for Commercial Property Relationships During the Covid-19 Pandemic with the objective to “support businesses to come together to negotiate affordable rental agreements. It builds upon the discussions already taking place by giving those tenants and landlords affected by the crisis the tools to come to a mutually beneficial agreement; ensuring that best practice becomes common practice.”

Here is a link to the Code of Conduct as updated on 6 April 2021:

Code of Practice for commercial property relationships during the COVID-19 pandemic - GOV.UK (www.gov.uk)

In the introduction, it states, “Government has always been clear that tenants who are able to pay their rent in full should continue to do so, whilst those businesses that cannot pay in full should communicate with their landlord and pay what they can. Landlords should also provide support to businesses if they too are able to do so.”

The Government has since signalled an intention to put into legislation a revised Code of Practice and other measures. More details are awaited and see our comments below about this.

 

What protections are in place in respect of forfeiture of leases of commercial premises?

The Coronavirus Act 2020 and subsequent Regulations have put in place restrictions on the ability of landlords to forfeit a lease during the relevant statutory period that began on 26 March 2020 and will end on 25 March 2022 (unless extended). During that period and in respect of relevant business tenancies, a landlord may not enforce a right of re-entry or forfeiture for non-payment of rent and no conduct by or on behalf of a landlord is to be regarded as waiving a right of re-entry or forfeiture for non-payment of rent unless a landlord gives an express waiver in writing.

 

What restrictions are currently in place on presenting winding up petitions against corporate tenants for commercial rent debt?

The current restrictions apply until 30 September 2021 pursuant to the Corporate Insolvency and Governance Act 2020 (‘CIGA’). They prevent the presentation of a winding up petition against a company based on a statutory demand served between 1 March 2020 and 30 September 2021, and the presentation of a winding up petition between those dates, relying on a company’s inability to pay its debts unless there are reasonable grounds for believing that the Covid-19 pandemic has not had a financial effect on the company or the debt would have arisen in any event.

 

What changes are coming into force regarding the presentation of winding up petitions?

Regulations made on 8 September 2021 are replacing the current restrictions with new measures applicable during the period from 1 October 2021 until 31 March 2022. However, restrictions will remain in place during that period which will prevent the presentation of winding up petitions against corporate tenants for commercial rent arrears or other sums due under business tenancies that are unpaid because of a financial effect of coronavirus. Landlords might consider the possibility of pursuing a winding petition if rent arrears have not been caused by a financial effect of coronavirus but should note that other conditions apply during the period to the effect that a creditor may not present a winding-up petition for a debt or debts totalling less than £10,000.00 and not without first having delivered a written notice on the debtor company seeking proposals for payment of the debt with no proposal having been received from the debtor company to the creditor’s satisfaction within 21 days.

 

What restrictions are currently in place regarding Commercial Rent Arrears Recovery (‘CRAR’)?

CRAR is a statutory procedure that has been in place since 6 April 2014 which landlords can use to recover rent arrears that have fallen due in respect of commercial premises pursuant to a written lease.  After giving a tenant 7 clear days’ notice of enforcement with the required form containing the required information, landlords can instruct enforcement agents to enter commercial premises and seize or secure a tenant’s goods (provided they are non-exempt goods) and sell them for the best price that can reasonably be obtained and to apply the proceeds to the equivalent value of the outstanding amount (unpaid debt plus recoverable costs).

To use the CRAR procedure a minimum amount of rent must be outstanding. Prior to coronavirus legislation, the minimum outstanding sum was 7 days’ rent.

By various Regulations (The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations), the minimum sum that must be outstanding before a landlord can enforce CRAR has increased as follows:

 

25 April 2020 to 23 June 2020: 90 days’ rent;

24 June 2020 to 29 September 2020: 189 days’ rent;

29 September 2020 to 24 December 2020: 276 days’ rent;

25 December 2020 to 24 March 2020: 366 days’ rent;

25 March 2021 to 23 June 2021: 457 days’ rent;

24 June 2021 to 25 March 2022: 554 days’ rent.

 

Can a landlord of commercial premises oppose the renewal of a business lease on the grounds of a failure to pay rent?

Where a business lease has the protection of security of tenure under the Landlord and Tenant Act 1954, one of the statutory grounds on which a landlord is able to oppose a lease renewal by a tenant is “that the tenant ought not to be granted a new tenancy in view of his persistent delay in paying rent that has become due” (section 30(1)(b) LTA 1954).

However, the Coronavirus Act 2020 and subsequent Regulations have introduced provisions that stipulate that for the purposes of determining whether a landlord can establish that a tenant has persistently delayed in paying rent that has become due, any failure to pay rent during the relevant statutory period of 26 March 2020 to 25 March 2022 (whether the rent fell due before or in that period) is to be disregarded.

 

What is the Government doing about ‘ring-fencing’ rent arrears?

Firm details are awaited but the Government has released details of its intentions.

On 16 June 2021, the Government published the press release that you can find using this link:

Eviction protection extended for businesses most in need - GOV.UK (www.gov.uk)

 

It announced that, legislation will be introduced in this session to ringfence outstanding unpaid rent that has built up when a business has had to remain closed during the pandemic. Landlords are expected to make allowances for the ringfenced rent arrears from these specific periods of closure due to the pandemic, and share the financial impact with their tenants.

The legislation will help tenants and landlords work together to come to an agreement on how to handle the money owed – this could be done by waiving some of the total amount or agreeing a longer-term repayment plan.

This agreement should be between the tenant and landlord and, if in some cases, an agreement cannot be made, the law will ensure a binding arbitration process will be put in place so that both parties can come to a formal agreement. This will be a legally binding agreement that both parties must adhere to.”

On 4 August 2021, the Government published its Policy Paper about supporting businesses with commercial rent debts:

Supporting businesses with commercial rent debts: policy statement - GOV.UK (www.gov.uk)

In that Policy Paper, the Government states, The government will legislate to ringfence rent debt accrued during the pandemic by businesses affected by enforced closures and set out a process of binding arbitration to be undertaken between landlords and tenants.

This is to be used as a last resort, after bilateral negotiations have been undertaken and only where landlords and tenants cannot otherwise come to a resolution. Ahead of the system being put in place, we will publish the principles which we will seek to put into legislation in a revised Code of Practice, to allow landlords and tenants time to negotiate on that basis.

Section 82 of the Coronavirus Act 2020, which prevents landlords of commercial properties from being able to evict tenants for the non-payment of rent, will continue until 25 March 2022, unless legislation is passed ahead of this, in order to provide sufficient time for this new process to be put in place.

Government is clear that those tenants who have not been affected by closures and who have the means to pay, should pay. Additionally, government expects commercial tenants to begin paying rent as per their lease from the point of restrictions being lifted for their sector.

As soon as legislation is passed, the commercial tenant protection measures will only apply to ringfenced arrears. This includes rent debt accrued from March 2020 by commercial tenants affected by COVID-19 business closures until restrictions for their sector are removed.

This means that landlords will be able to evict tenants for the non-payment of rent prior to March 2020 and after the end of restrictions for their sector and who have not been affected by business closures during this period.

The measures announced by government – the extension of current provisions, publication of a strengthened Code of Practice, and the development of a system of binding arbitration – triggers the start of a return to ‘business as usual’, by balancing protecting landlords and supporting those businesses most in need.

It will ensure that many viable businesses can continue to operate, and that debts accrued as a result of the pandemic are quickly resolved to mutual benefit.”

 

What other options does a landlord have to recover rent arrears owed from a tenant of commercial premises?

In appropriate circumstances, landlords should consider whether they can recover rent from rent deposits, former tenants, guarantors, sub-tenants and debt recovery proceedings. These options may not be available and may have down-sides and it is highly recommended that specific legal advice is sought before attempting to take any such action.

 

We considered some of the issues in this blog in our earlier blogs, see:

Commercial Landlords and Tenants: Diarise 30 September 2020! (mwh-law.co.uk)

For Commercial Landlords: What to do when tenants stop paying rent (mwh-law.co.uk)

 

If you are a landlord or tenant of commercial premises and require any specific advice or assistance about any of the issues referred to in this blog, or any other related issues, please contact Yvonne Addy by telephone on 0207 486 5131 or by email to yvonne.addy@mwh-law.co.uk or make an online enquiry here.

 

This blog was prepared on 28 September 2021. It is not intended to be advice and should not be relied upon as such.

In every case that we handle, we are committed to the very highest levels of client care