What are the options for a commercial landlord attempting to recover rent arrears?
As lockdown continues throughout November 2020, commercial tenants are under immense pressure to fulfil their obligations especially where they have had to close their business or operate on a limited basis. Due to the various restrictions, there are fewer options than usual available to recover any outstanding arrears that may be accruing. Here is a summary of the remedies a landlord can consider at this time.
If a tenant has accrued rent arrears a landlord does have the option to forfeit the lease. Due to the new measures pursuant to the Coronavirus Act 2020 (CA 2020) s82, a landlord cannot currently forfeit a commercial lease and will not be able to do so before the 31 December 2020 (under the ground of non-payment of rent and other sums falling due under the lease).
Since this article was written, the moratorium on forfeiting a commercial lease for non-payment of rent has been extended to 25 March 2022.
A landlord can still forfeit for another breach other than non-payment of rent before this time.
If proceedings are already underway (commenced on or before 26 March 2020), the possession date cannot be before 31 December 2020.
A landlord cannot waive the right to forfeit for unpaid rent during this time unless an express waiver is given in writing.
CRAR – Commercial Rent Arrears Recovery
CRAR allows landlords of commercial premises to seize a tenant’s goods from the premises in order to recover unpaid rent.
CRAR can be exercised against pure rent. This is the amount payable under the lease for possession and use of the premises plus VAT and interest. This does not include arrears of service charge or an amount due for repairs, maintenance and insurance.
Due to COVID-19 there are limitations on when you can use this recovery process. From 29 September 2020, the minimum amount of net unpaid rent must be the equivalent of 276 days’ rent where notice of enforcement is given and goods are taken control of for the first time on or before 24 December 2020, and the equivalent of 366 days’ rent where notice of enforcement is given or goods taken control of for the first time on or after 25 December 2020.
Whilst exercising CRAR would normally waive the right to forfeit, there is now a protection against this but care should be taken however that a right to forfeit is not waived by exercising CRAR after the protection ends (currently on 31 December 2020).
It has been agreed that Enforcement Agents do not take control of goods in England while national restrictions are in place (5 November to 2 December 2020) BUT the restrictions do not appear to apply to entering commercial premises and as such do not impact on CRAR.
Issuing proceedings to recover debt
If you have an outstanding debt you are still able to issue a claim for this unpaid rent through both the County courts and the High court.
Do check to see if the pre-action protocol for debt claims applies to your claim and adhere to it if it does. It will apply where any business (including a sole trader and public body) is claiming payment of a debt from an individual including a sole trader.
The debt recovery process through the courts is generally slower than usual now courts are under pressure due to the current back log resulting from COVID-19 but you are still able to use this process.
Once you have served your claim the tenant has 14 days to file an acknowledgement of service or 28 to file a full defence.
If the tenant is not entitled to exercise a right of set-off, deduction or counterclaim in respect of rent payments pursuant to the lease, it may be possible to apply for ‘summary judgment’. With this process you are asking the court to determine the claim as the defendant has no real prospect of defending it (and there is no other compelling reason why the claim should proceed to trial).
The threat of such an application may be very useful to a landlord and can be a quicker and more cost effective way of getting the case finalised compared to going through a full trial. Do note that even if you are successful you will then have to enforce any judgment you get.
Statutory demand / winding-up petitions
A landlord can technically still serve statutory demands but they have no effective worth as they are prohibited from forming the basis of any winding-up petition. This is pursuant to the on-going restrictions in the Corporate Insolvency and Governance Act 2020 (CIGA), currently effective up to 31 December 2020 although this time-frame may well be extended again.
Even if and when the prohibition is lifted, any existing statutory demands from before 1 March 2020 (when CIGA took effect) should be re-issued given the passage of time.
Winding-up petitions may still be presented without first issuing a statutory demand. However, they will only succeed where the landlord creditor can show reasonable grounds that either coronavirus has not had a financial effect on its tenant or the tenant would have been unable to pay the rents irrespective of coronavirus. These are high thresholds for the landlord to meet as courts are interpreting those conditions sympathetically in favour of tenant debtors.
This does not prevent landlords from having other recourse; they can still draw on rent deposits and claim under guarantees (see below). They can also still make a court application for the tenant to be placed into administration.
The coronavirus measures do not affect the landlord’s ability to serve a statutory demand on an individual.
A superior landlord has a right to recover rent from a sub-tenant if it has a right to exercise CRAR against an immediate tenant and there is a sub-lease in place.
The CRAR procedure gives a superior landlord a right to serve a notice under s81 of the Tribunal, Courts and Enforcement Act 2007 (TCEA) on its subtenant requiring them to pay the rent directly to the superior landlord to the extent of the arrears due from the immediate tenant. If the subtenant does not do this to do so, the superior landlord can exercise CRAR and other remedies against it.
It is possible that any administrator or liquidator of the immediate tenant may look to intervene and keep rents from subtenants while resisting payment to their own landlord. If this happens, there are options available to superior landlords which depend on the circumstances.
A landlord is generally unable to exercise CRAR unless an amount equal to at least 90 days’ rent is overdue. This was increased to 189 days’ rent from 24 June, to 276 days’ from 29 September, and will rise to 366 days’ rent from 25 December. Given the amount of days rent that needs to be outstanding to exercise CRAR, to serve notice on a subtenant during the September quarter (29 September – 24 December), the superior landlord’s immediate tenant must be in arrears of 276 days’ rent or more.
Check the terms of any deposit deed – a landlord can usually draw down on the deposit for any default or breach.
‘Rent’ is defined in s82 CA 2020 as including ‘any sum a tenant is liable to pay under a relevant business tenancy’, so it can be argued that a tenant’s failure to top up a deposit once the monies have been taken out may be covered by the restrictions on forfeiture for non-payment of rent (see above under ’Forfeiture’).
Drawing down on a rent deposit will not waive a right to forfeit that may arise.
The new 20-business day moratorium introduced by CIGA (see below) may also affect what a landlord can do with the rent deposit in any event.
Former tenants / guarantors
The Landlord and Tenant (Covenants) Act 1995 creates liability for former tenants and guarantors to pay rent and service charge after assignment of a lease.
A landlord may recover ‘fixed charges’ from a former tenant or its guarantor if the former tenant remains liable due to privity of contract or because it has given an authorised guarantee agreement (in the case of new tenancies). The landlord must have given notice (a section 17 notice) under within six months of the date on which the charge became due.
Section 17 notices are not directly impacted by COVID-19, although should the notice not result in making the tenant pay, any debt recovery proceedings issued may be subject to delay as a result of the limited opening of the courts and the backlog of claims.
When serving any section 17 notice, if parties are not operating from their usual business premises, do note the deemed services provisions that operate under Law of Property Act 1925, s96 to avoid any issues with potentially invalid service, in brief:
- leave it at the last-known place of business; or
- send by post in a registered letter at the place of business; and that service shall be deemed to be made at the time at which the registered letter would in the ordinary course be delivered.
Points to note:
New CIGA Moratorium
One of the other measures brought in by CIGA is a new stand-alone moratorium which prevents creditors from taking any enforcement action, initially for a period of 20 business days (which can be extended). This would include taking steps to enforce any security, distrain or take possession of goods, exercising any forfeiture rights, though likely should not prevent drawing on rent deposits. Importantly, despite being termed ‘stand-alone’ the moratorium is designed to give breathing space to companies in financial trouble to consider their options. They will in practice be used in conjunction with and preceding other restructuring or insolvency-related procedures and effectively act as advanced notice. Faced with a moratorium, landlords should seek specialised advice on protecting their position, legally and commercially.
Possession proceedings at this time
Any proceedings for possession brought under CPR 55 which includes any proceedings for forfeiture of a lease and all proceedings seeking to enforce an order for possession by a warrant or writ of possession (with some exceptions), were stayed until 20 September 2020.
The stay has now expired and there is a new possession procedure which will run until 28 March 2021 with a large backlog of cases.
A new set of rules called the Overall Arrangements along with PD 55C now govern how cases proceed from issue to eviction and we can supply more detailed information on this.
In summary the new procedure provides that for cases commenced before 3 August 2020 no further steps will be taken in the proceedings until a ‘reactivation notice’ is filed. For other cases (whether a new claim or a stayed claim) brought after that date, the claimant must serve on the defendant a notice 14 days prior to the hearing date setting out what knowledge they have as to the effect of COVID-19 on the defendant and any dependents. Changes have been made to how cases are heard and when dependent on their nature and if they are listed as a special COVID-19 case (Covid case marked).