Continued restrictions on commercial landlords

27th Jul 2021

On 19 July 2021 England welcomed so-called ‘Freedom Day’, when most Covid-19 restrictions came to an end. However, restrictions on enforcement options open to commercial landlords faced with tenants in rent arrears have been further extended.

Prior to the pandemic, we were frequently instructed by landlords to effect forfeiture of commercial leases due to tenants not paying rent, or to advise as to other available options such as Commercial Rent Arrears Recovery or insolvency proceedings.

The Coronavirus Act 2020 (“CVA 2020”) came into force on 26th March 2020. This was passed as an emergency measure in response to the Covid-19 outbreak. The CVA 2020 covers a wide range of matters and has significant implications for landlords and tenants of both commercial and residential premises. This update focuses on commercial tenancies in England only.

Restrictions on forfeiture

Section 82(1)-(12) of the CVA 2020 restricts the ability of landlords of commercial premises to forfeit a lease during the “relevant period”.

The relevant period began on 26th March 2020 and was due to end on 30th June 2020, but regulations have been made which have extended this period in England and Wales initially to 30th September 2020, then to 31st December 2020, then to 31st March 2021, then to 30th June 2021 and most recently to 25th March 2022 in England and until 30th September 2021 in Wales.

This means that, in England, until 25th March 2022 (“the Relevant Period”), the following restrictions will apply in relation to business tenancies:

  • A right of re-entry or forfeiture for non-payment of rent may not be enforced.
  • 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 the landlord gives an express waiver in writing.
  • If High Court proceedings have already commenced to enforce a right of re-entry or forfeiture for non-payment of rent, any possession order must ensure that the tenant does not have to give possession before the end of the Relevant Period.
  • Where the High Court has already made an order for possession to enforce a right of re-entry or forfeiture for non-payment of rent which requires possession to be given during the Relevant Period unless the tenant complies with some requirement (for example to clear the arrears by a certain date), the tenant can apply to vary the order and if it does so the High Court must ensure that the tenant does not have to give possession before the end of the Relevant Period.
  • If County Court proceedings have already commenced to enforce a right of re-entry or forfeiture for non-payment of rent, any possession order made under section 138(3) of the County Courts Act 1984 must not specify a date for possession that is before the end of the Relevant Period.
  • Where the County Court has already made an order for possession to enforce a right of re-entry or forfeiture for non-payment of rent which requires possession to be given during the Relevant Period, the date for possession will be treated as having been extended so that it expires at the end of the Relevant Period.

There is no requirement that the tenant’s failure to pay the sums due must have been as a result of COVID-19. Therefore, the restrictions will apply irrespective of the tenant’s reasons for non-payment.

It is important to note that landlords are not prevented from enforcing a right of re-entry for a breach of other covenants in a lease or denial of the landlord’s title. The landlord could conceivably, therefore, still forfeit for breaches other than the non-payment of rent. However, landlords should have regard to the tenants’ ability to remedy a breach during the COVID-19 outbreak when considering what a reasonable period of time is for a tenant to remedy a breach, give-up possession or apply for relief.

Commercial rent arrears recovery (CRAR)

CRAR allows a landlord of commercial premises to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears. The amount of net unpaid rent which must be outstanding before CRAR is exercised was previously set at an amount equal to 7 days’ rent.

Since the coming into force of the CVA 2020 various regulations have increased the minimum net unpaid rent that must be outstanding before CRAR may take place. Most recently, The Taking Control of Goods (Amendment) (Coronavirus) Regulations 2021 (SI 2021/300), in effect from 25 March 2021, increased this to 457 days between 25 March and 23 June 2021, and 554 days on and after 24 June 2021.

The restrictions on the use of CRAR apply during the Relevant Period under section 82 of the CVA 2020. This means that the restrictions on the use of CRAR have also been extended to 25th March 2022.

Restrictions on winding-up petitions and winding-up orders

The Corporate Insolvency and Governance Act 2020 (CIGA 2020) came into force on 26 June 2020. It restricts the presentation of debt-related winding-up petitions where a company cannot pay its bills (including rent) due to COVID-19.

These restrictions were due to end on 30th September 2020, but regulations have been made which have extended them initially to 31st December 2020, then to 31st March 2021, then to 30th June 2021 and subsequently until 30th September 2021.

Accordingly, a creditor cannot present a winding-up petition against a company based on a statutory demand that was served between 1st March 2020 and 30th September 2021, nor present a winding-up petition between 1st March 2020 and 30th September 2021 based on a company’s inability to pay its debts (including rent) unless the creditor has reasonable grounds for believing COVID-19 has not had a financial effect on the company, or that the company’s debt issues would have arisen in any event.

These restrictions only apply to corporate debtors. Therefore, if a tenant is a sole trader there are no restrictions on serving a statutory demand or issuing a bankruptcy petition.

Conclusion

In view of the continued restrictions, landlords and tenants are encouraged to negotiate with one another to address any outstanding rent and service charge arrears. The government has published a voluntary Code of Practice for Commercial Property Relationships During the COVID-19 Pandemic. The Code encourages tenants to continue to pay their rent in full if they are able to do so, or otherwise to pay what they can, whilst acknowledging that landlords should provide support to businesses if they too are able to do so.

If it is not possible to reach an agreement, the CVA does not restrict landlords’ rights to pursue other action, such as bringing a claim for debt, damages or mesne profits, drawing down on any rent deposit held or pursuing a guarantor.

If you are a tenant facing difficulties with rent arrears or a landlord with a tenant who is not paying their rent, our property litigation team can advise you as to your options.

 

*This article is provided for general information purposes only and does not constitute legal or any other professional advice.