By Real Estates Disputes partner, Tim Rayner
Much has been written in the legal, property and general press about the difficulties surrounding the issue of commercial rents; the headlines often being grabbed by reports of battles between non-institutional landlords and large national retailers.
Last week the Government announced new temporary measures which represent a potential life line to high street businesses but which conversely, without a similarly landlord-friendly package from the Government maybe a nail in the coffin for smaller investment landlords who are reliant on rent for survival. The Government describes some landlords as being “aggressive” but in some instances, it may be fairer to describe some as desperate or relying on existing legal rights.
Under the Coronavirus Act 2020 the Government had already temporarily banned forfeiture (i.e. eviction) for non-payment of rent. That left landlords with a more limited range of unilateral options for seeking to recover unpaid rents which included taking a rent deposit, issuing debt proceedings, the use of Commercial Rent Arrear Recovery (“CRAR”) and finally, winding up petitions.
Under the new measures announced yesterday by the Business Secretary, the latter two of those remedies, namely, CRAR and winding up have been severely restricted. The Business Secretary said: “Some landlords have been putting tenants under undue pressure by using aggressive debt recovery tactics.
To stop these unfair practices, the government will temporarily ban the use of statutory demands and winding up orders where a company cannot pay their bills due to coronavirus, to ensure they do not fall into deeper financial strain. The measures will be included in the Corporate Insolvency and Governance Bill, which the Business Secretary Alok Sharma set out earlier this month.
Government is also laying secondary legislation to provide tenants with more breathing space to pay rent by preventing landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent.”
At the same time, the Government said it “calls on tenants to pay rents where they can afford it or what they can in recognition of the strains felt by commercial landlords too” and that it was “working with banks and investors to seek ways to address [the very serious pressures on landlords] and guide the whole sector through the pandemic”.
• Clearly these measures are designed to help High Street businesses, many of whom are badly in need of support to protect their cash. The measures will prevent High Street businesses from those landlords who are pursuing tenants who simply cannot pay the rents at this time.
• To avoid a winding up order a tenant will need to show that the reason they cannot pay is “due to coronavirus”. It remains to be seen the extent to which landlords will press tenants on showing the inability to pay is in fact coronavirus-related or simply because they do not want to pay.
• There is clearly a moral compunction on those tenants who can afford to pay the rents to do so. However, the few remaining negotiating levers landlords previously had to require those cash-rich, often still trading tenants to pay have now been largely removed. Landlords still have the option of issuing debt proceedings but enforcing the Judgment Debt by seeking a winding up order is banned which may mean debt proceedings lack any real teeth.
• CRAR remains legally possible if the debt is greater than 90 days but there are practical difficulties of instigating this process given the social distancing measures. Many enforcement agents have been unwilling to attend the premises for this reason.
• It is important to remember of course that whilst landlords’ remedies may be restricted by these and the previous measures, the rent is still due, and the tenant remains liable to pay it. This has some potentially far-reaching consequences, for instance:
- Depending on how the Government deals with the lifting of these restrictions, tenants will be immediately at risk of forfeiture (under the previous measures during this period a landlord’s right to forfeiture cannot be waived).
- Tenants will also be immediately at risk of being wound up, or subject to CRAR or enforcement of a Judgment Debt obtained during this period.
- When and how will the Government lift these restrictions? If, as seems likely, the restrictions are lifted shortly after the ‘lockdown’ is lifted (no doubt with some kind of social distancing still in place) then it may be reasonable to assume that the High Street will still be struggling. Therefore tenants will be faced with finding backdated rent even though business has not picked up to pre-COVID-19 levels. In one sense, these measures could be seen as simply ‘kicking the can down the road’.
- Will tenants therefore need to safeguard or ring-fence the rent arrears to ensure that they are ready to pay as soon as the restrictions are lifted?
- Depending on how and when these restrictions are lifted there will almost certainly be a flurry of enforcement actions by landlords immediately on the lifting of these restrictions.
• There is no doubt that landlords and tenants need to come together at this time to find a solution which works for both. There is bad practice on both sides of the fence with some landlords being unnecessarily aggressive against those tenants who genuinely cannot pay and equally, some cash-rich trading large occupiers using COVID-19 as an excuse to avoid paying what they both legally and morally should pay.
• Commercial tenants are not unique in having cash issues as a result of this crisis and many landlords will also be struggling, especially those with a retail-focused portfolio. Arguably these measures simply shift the cash flow problem from the High Street Business to the landlord.
• Details of the outcome of the work the Government said it is doing to help address the issues for banks and landlords is clearly just as important for landlords and without that these the current measures are arguably incomplete.
This article first appeared in CoStar on 24th April 2020.