By Alan Hamblett, partner at debt recovery and asset finance solicitors, Corclaim (https://www.corclaimdebt.co.uk/people/alan-hamblett)
Back in the day, when the second wave was only being talked about as if it were a remote but unlikely possibility and when everything was going to be back to normal by Christmas, the government published a code of practice for commercial property relationships during the Covid-19 pandemic. This was obviously based on the government’s inability to see beyond the horizon. The long term effects of its proposals have clearly not been thought through.
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”. So far, so good.
The code relied upon “transparency and collaboration”, a “unified approach” by all stakeholders including government, utilities, banks and others to achieve outcomes reflecting the code’s objectives, “acting reasonably and responsibly” and, perhaps most crucially, government support.
In the early days we had government-backed loans and grants, business rates relief and VAT deferral to help with cash flow. Whether any further government support will become available, as we face increasingly restrictive measures, remains to be seen.
Subject to all of that, the code suggests that landlords and tenants should talk to each other. Common sense. Landlords should be willing to provide concessions where they “reasonably” can, taking into account their own financial commitments and information provided by the tenant, which should be treated sensitively and confidentially, about the financial impact of restricted trading. Landlords refusing concessions should explain to tenants why they are doing so.
It was suggested that new arrangements could, for example, involve:
(a) A rent free period;
(b) A deferral of rent (although thought would have to be given as to how this is going to be paid in the future);
(c) Payment monthly rather than quarterly;
(d) Rent reduction geared to turnover;
(e) Withdrawal from rent deposit – on the understanding that the landlord will not require it to be topped up;
(f) Waiver of interest on late payment.
The code also covers service charges and says that these should be reduced where the lack of the use of a property has lowered the cost of providing services. This is probably a legal requirement any way.
Any variation to the lease should be confirmed by written memorandum – speak to your solicitor if in doubt.
If rent concessions are agreed with tenants, it should be confirmed in writ- ing that these will terminate automatically if any proposal for a voluntary arrangement is put forward by the tenant for creditors to vote upon. This will mean that the landlord’s voting rights will be by reference to the full amount and not the reduced amount.
If reasonable arrangements cannot be agreed by the parties, then what can a landlord do?
First, let’s look at what a landlord cannot do.
Forfeiture of commercial leases for non-payment of rent is still prohibited by section 82 of the Coronavirus Act 2020. This prohibition originally expired on 30th June, was extended to 30th September and now runs until 31st December 2020. No doubt it will be extended again.
CRAR (Commercial Rent Arrears Recovery) is no longer available either unless at least 9 months’ rent is overdue. That will be increased to 12 months’ arrears at the next quarter day on 25th December.
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. The burden of proof is on the landlord to show this.
A number of options do remain open though.
It is still possible to issue debt proceedings against the tenant or guarantor. Judgment can be enforced in the usual way, including instructing a High Court Enforcement Officer to seize goods from the premises, although this is rarely considered a suitable option where the tenant is a trading entity. Clearing the premises of stock and equipment would be the final nail in the coffin. The better option may be to look to the guarantor, if there is one.
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 rather than to its own intermediate landlord. This is, however, subject to the same restrictions as CRAR. As at today, the rent must be at least 276 days in arrears and this will increase to 366 days on 25th December.
Although forfeiture is not permitted on the basis of non-payment of rent, it is still permitted on the basis of other breaches of covenant where the lease permits. This is, of course, subject to the requirements of section 146 of the Law of Property Act to give notice of breach and allow time for any breach to be remedied. If in doubt, speak to your solicitor.
Finally, if a tenant goes into administration, rent and other sums due under the lease (including service charges) are payable as an expense of the administration, i.e. ahead of other creditors, where the premises continue to be used for the benefit of the administration. This is payable by the administrator.
The question, as always, is whether you want to maintain a long commercial relationship with your tenant or whether your own cash flow is the priority.