COVID-19 Real Estate Update: Business leases: further suspension of landlords’ enforcement rights

Summary

On April 23, 2020, the Government announced additional temporary curbs on landlords pursuing outstanding rent.

This is hot on the heels of Section 82 of the Coronavirus Act 2020 which came into force on March 20 and prevents the enforcement of a landlord’s right to forfeit a business lease for non-payment of rent until at least June 30, 2020.

What has been announced?

The Government has said that it is concerned about “aggressive rent collection” and is taking additional measures to safeguard businesses in the UK that are vulnerable as a result of the current pandemic. Statutory demands and winding up petitions issued to commercial tenants are temporarily “voided” with retrospective effect and temporary limitations are imposed on the use of Commercial Rent Arrears Recovery (CRAR) by landlords and enforcement agents.

Statutory demands and winding up petitions

In the case of a company, a statutory demand is a formal written demand for payment within 21 days of a debt that exceeds £750. If the debtor does not pay or apply to court within 21 days for an order restraining the presentation of a winding up petition, the creditor can present a petition to the court for a winding up order.

The Government has said that it is banning the use of:

• Statutory demands made between March 1, 2020 and June 30, 2020
• Winding up petitions presented from Monday April 27, 2020 through to June 30, 2020, where a company cannot pay its bills due to coronavirus. Any winding up petition that claims that a company is unable to pay its debts must first be reviewed by the courts to determine why. If the inability to pay is as a result of the pandemic, the petition cannot be presented nor a winding up order made.

At the time of writing, draft legislation has not been published and therefore there is not much flesh on the bones. However, the intention is that both measures will be included in the proposed Corporate Insolvency and Governance Bill.

CRAR

CRAR came into force on April 6, 2014 and is a statutory method of enforcement to recover rent arrears relating to commercial property, replacing the common law right of distress.

Since its announcement on April 23, the Government has acted swiftly and has already laid secondary legislation to provide tenants with more breathing space to pay rent by imposing temporary restrictions on the exercise of CRAR. The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 came into force on April 25, 2020 and prevent landlords using CRAR unless they are owed at least 90 days of unpaid rent. The restriction applies where the notice of enforcement is given during the “relevant period”. This started on April 25 and is defined by reference to the “relevant period” under Section 82 of the Coronavirus Act 2020 during which protections from forfeiture for business tenancies are in place: a period ending on June 30, 2020 or such other date as may be specified in regulations. There are also temporary limitations on enforcement agents taking control of goods under CRAR.

The Regulations are not retrospective in that any enforcement action taken before April 25, 2020 is not affected.

Comment

We await draft legislation to establish precisely how the ban on the use of statutory demands and winding up petitions will work in practice. For example will it extend to guarantors or merely tenants? Does it extend to arrears of other sums such as service charges or merely rent? The Government announcement refers to “aggressive debt recovery” as well as ”aggressive rent collection” which suggests that it will.

While the announcement will undoubtedly be welcomed by struggling tenants, they should bear in mind that it only amounts to a temporary reprieve and doesn’t override either the obligation in leases to pay rent or the standard requirement to pay interest on late payments.

Many landlords will be dismayed as they are facing their own serious pressures and may have concerns about potential breaches of covenant. The Financial Conduct Authority and others have issued a statement encouraging investors and lenders to take into account the issues arising directly from the COVID-19 pandemic in responding to such breaches.

The Government press release encourages landlords and tenants having difficulty paying rent to take a collaborative approach and to negotiate a way forward. This must surely be the commercially sensible solution.