By Alan Hamblett, Director at Corclaim (www.corclaimdebt.co.uk)
“I can’t abandon that tool any more than I would abandon a nuclear deterrent. But it is like a nuclear deterrent, I certainly don’t want to use it. And nor do I think we will be in that position again” – Boris Johnson, July 2020.
In June 2020, when a second wave and a second lockdown were being talked about as an unlikely possibility, the government published a code of practice for commercial rent debt. This was designed to encourage landlords and tenants to work together after the first lockdown. By Christmas, Johnson assured us, every- thing would be back to normal.
We are now emerging from a third lockdown resulting in the closure of most retail outlets, pubs and restaurants until at least April. The re-opening will this time, we are told, be “irreversible”. With rates rising again across Europe, it remains to be seen how the word “irreversible” will come to be re-defined in the coming months.
In the meantime though, landlords and tenants have a £2bn mountain of debt to move and this is continuing to grow all the time.
So, what does the Code say? How should responsible landlords and tenants work together?
The foreword says that “Government has always been clear that tenants who are able to pay their rent in full should continue to do so, whilst those businesses that cannot pay in full should communicate with their landlord and pay what they can. Landlords should also provide support to businesses if they too are able to do so”. Helpful?
Landlords are property owners who have loans to service, investors to satisfy, properties to maintain and other overheads to meet. They may also be brewers who have beer to sell. Tenants are business owners who have customers to satisfy, staff to pay, Covid regulations to observe, suppliers and other overheads. And of course, both landlords and tenants are in business to make profit.
Whilst, historically, there may have been an element of mistrust – especially in the pub sector – between landlords and tenants as to equality of bargaining power and fairness, it is essential for the survival of so many businesses that landlords and tenants should now work together.
Tenants must explain what financial help they have obtained and what they have done with it. There are of course government grants available for exactly this purpose. Landlords should be willing to provide concessions where they “reasonably” can, taking into account their own financial commitments and all the information provided by the tenant, which should be treated sensitively and confidentially, about the financial impact of restricted trading. Landlords refusing concessions should explain openly to tenants why they are doing so. Concessions could, for example, involve a rent free period, deferral of rent, payment monthly rather than quarterly, or waiver of interest on late payment. Any variation to the lease should be confirmed by written memorandum – speak to your solicitor if in doubt.
It should be confirmed in writing that any rent concessions will terminate automatically if any proposal for voluntary arrangement is put forward. The landlord’s voting rights will then be by reference to the full amount and not the reduced amount. If reasonable arrangements cannot be agreed by the parties, then how can a rent debt be enforced?
First, let’s look at what a landlord cannot do. Forfeiture of commercial leases for non-payment of rent is still prohibited. This prohibition originally expired on 30th June 202 and has been extended every three months.
It currently expires on 30th June 2021. No doubt it will be extended again. CRAR (Commercial Rent Arrears Recovery) is no longer available either unless the debt pre-dates Covid.
Statutory demands and winding up petitions are prohibited unless it can be shown that the debt is not due to the effects of the virus on the debtor’s financial position. It is still possible to issue debt proceedings against the tenant or any guarantor. Judgment can be enforced in the usual way. It may also be possible to pursue a previous tenant if the lease was assigned to the current tenant. A section 17 notice will have to be served within six months of the debt falling due.
Where the tenant has sublet the premises, it is possible to serve notice on the subtenant requiring the rent to the paid direct to the superior landlord. Although forfeiture is not permitted on the basis of non-payment of rent, it may be permitted on the basis of other breaches of covenant. If in doubt, speak to your solicitor.
The question, as always, is whether you want to maintain a long commercial relationship or whether your own immediate cash flow is the priority.