COVID-19 – Are landlords running out of remedies? (edited following grant of Royal Assent)
Further emergency measures are to be introduced to protect tenants from landlords 'aggressively' pursuing rent arrears.
The Government announced on 23 April 2020 that measures to protect tenants from landlords pursuing rent arrears via statutory demands, winding up proceedings and seizure of goods are to be introduced. These measures, which will be in addition to the moratorium on forfeiture contained in the Coronavirus Act 2020, will be, in part, included in pending legislation called the Corporate Insolvency and Governance Bill 2020 (the Bill). This Bill went on to receive Royal Assent on 25 June.
There are, in summary, two aspects to the new restrictions:
A temporary ban via the Bill on the use of statutory demands and winding up petitions/orders against commercial tenants who are unable to pay rent as a result of COVID-19.
Statutory demands can usually be served by landlords seeking to recover rent which has been in arrears for more than 3 weeks and are used to commence insolvency proceedings against a debtor via a winding-up petition (presented on the basis that the party in question is in unable to pay its debts). A winding-up petition which claims that a tenant is unable to pay its debts must first be reviewed by the court before an order is made. The Bill, once enacted, will not permit petitions to be presented or winding up orders to be made if the reason for the tenant's inability to settle debts is as a result of COVID-19.
The prohibition will be in force until 30 June, but could be extended in line with the moratorium on commercial lease forfeiture. The Bill itself has not yet been published and as such it is not possible to scrutinise the detail of the proposed legislation but it seems clear that it will be difficult for a landlord to prove that a failure to pay rent was not Covid-19 related as in reality most tenants could argue that their financial position had been impacted by the lockdown.
New secondary legislation will also be introduced to prevent landlords from using Commercial Rent Arrears Recovery (CRAR) unless they are owed at least 90 days of unpaid rent (an increase from the current minimum of 7 days arrears).
The CRAR procedure is used by landlords to recover rent arrears relating to commercial property and permits a landlord to take control of a tenant’s goods and sell them in order to recover an equivalent value to the sum owed.
Whilst these additional restrictions will no doubt provide welcome relief for tenants, once they are in force, the options open to landlords to recover unpaid rent will be further curtailed. It would still be open to landlords to issue a debt claim (and thereafter seek enforcement via, for example, a charging order) or to threaten forfeiture for a breach of non-financial covenants in the lease, subject, of course, to compliance with the statutory procedures for doing so. It is likely however that the courts would take a somewhat dim view of landlords doing so at the current time. The alternative, should the landlord's cash-flow allow it, would be to wait for these restrictions to be lifted and then forfeit the lease for non-payment, or petition for the full arrears.
If you would like to discuss any aspect of this article further, please contact Donna Radcliffe or any other member of the Property team on 0113 244 6100.
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors