• Coronavirus
  • December 08, 2020

How Can Commercial Landlords Deal with Rent Arrears in the Era of Covid?

Many SMEs are a tenant, but a good number also are a commercial property landlord.

On both sides of the commercial property lease equation, times are tough with the tenant and landlord each battling to survive.

The existing prohibition on forfeiting commercial leases for non-payment of rent, which was due to end on 30 September 2020, was further extended until 31 December 2020. 

This means that commercial landlords are generally unable to forfeit commercial leases nor use Commercial Rent Arrears Recovery (CRAR) provisions to enforce payment of rent arrears.

On the flip side, the extension does provide a lifeline to many commercial tenants as business activity has been severely hampered by Covid-19 and its fallout.

Landlords are clearly nervous with rent arrears accruing. Fears are building that they may not be able to recover arrears and are prevented from them accruing further. Constructive dialogue is encouraged between a landlord and tenant in order to reach an agreement, but it may not be possible to reach an acceptable compromise on a property lease.

With a landlord having the normal recourses curtailed if commercial tenants fall behind in paying their rent, what are their options to recover the debt owed?

• Enforce lease guarantees
• Draw down on rent deposits
• Issue of a debt claim at court (preceded by a letter before action) 
• Recover rent from subtenants

Statutory Demands for unpaid rent on a commercial lease can still be served, but no winding-up petition can now be presented before 31 December 2020 under the Corporate Insolvency and Governance Act (the CIG Act), save for limited circumstances

Under CIGA, it is still possible for a landlord to present winding-up petitions if they are able to show reasonable grounds for believing that coronavirus has not had a financial effect on the tenant company, or that the tenant company would have been unable to pay its debts regardless of the financial effect of coronavirus. 

Enforce Guarantees

The landlord can look to any guarantees that were provided at the time the lease was signed. Enforceable guarantees that may be pursued will be related to a common guarantee or an Authorised Guarantee Agreement (AGA). 

AGA is an agreement which places an obligation on an outgoing tenant to guarantee the performance by the new tenant or "Assignee" of the tenant covenants in the lease.

Rent Deposits

Commonly, a commercial property lease will require a rent deposit. This will be clearly stated in the lease. Can a commercial landlord utilise these funds when the tenant is in arrears? 

Whether a landlord is able to draw down on the deposit will depend on various matters. Most importantly the terms of the deed governing the deposit and how the deposit is held.

If the tenant has entered an insolvency of some kind, then there may be restrictions on drawing down on that deposit, although well drafted rent deposit deeds will avoid such restrictions by giving the landlord control of the deposit on an existing lease. This would make it a "financial collateral arrangement" for the purposes of the Financial Collateral Arrangements (No 2) Regulations 2003.

Go to court

Court proceedings for non-payment of rent are still available. The starting point for the court process is to send the tenant a pre-action letter – a qualified commercial property solicitor can get this set up for you. This might also have the benefit of starting a dialogue and lead to more cost-effective alternatives to litigation - for example, a payment plan, or deferral arrangement.

Recover from Sub Tenants

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 superior landlord can 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.

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 2020, and will rise to 366 days rent from 25 December 2020. Given the number 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.

What to do next

With one extension having been made and the Government having indicated that lockdown in some form will continue until at least Spring 2021, how will the Government balance the interests of a commercial tenant and landlord? 

On 19 June 2020, the government published a code of practice for a commercial landlord and tenant of commercial property across the UK. The code is voluntary but has been endorsed by a number of organisations including the RICS. The main principle of the code is "transparency and collaboration", with the government's aim is to encourage both a landlord and tenant to act "reasonably and responsibly" with regards to the prevailing commercial lease.

As a landlord, before you take any action on your commercial leases and seek the recovery of unpaid rent, it is recommended that you seek expert and qualified legal advice as to your options. 

When considering the remedies open to you, the pros and cons of each will need to be fully considered. In some cases, a particular action may prohibit others. An expert commercial lease solicitor from LawBite can provide advice on the choices open to you and the best course of action.

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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