With the effects of the Coronavirus pandemic disrupting the economy, the likelihood of commercial tenants defaulting on their rent payments is growing. However, when a tenant says they are unable to pay their rent, what options do commercial landlords have available? Rachel Sims of Hewitsons discusses the issues.
Commercial landlords - handling unpaid rent
What is the legal position?
The Coronavirus Act confirms that a landlord cannot exercise a right of re-entry (‘a forfeiture clause’) for non-payment of rent before 30 June (although that period may be extended by the Government).
A landlord cannot exercise the re-entry right by issuing court proceedings, neither can he exercise it by changing the locks (‘peaceable re-entry').
The provisions cover leases which are protected by the Landlord and Tenant Act 1954 and those that are expressly excluded from that Act. It does not include tenancies for less than 6 months, licences, tenancies at will or leases of telecoms equipment.
The provisions cover all sums that the tenant is liable to pay under the tenancy.
What about proceedings which have already been issued?
Changes made to the Civil Procedure Rules which govern how possession proceedings are dealt with in the UK courts go a little further. The amendments state that all possession proceedings, and also all proceedings seeking to enforce an order for possession, are stayed for a period of 90 days from 27 March.
This wording means the stay would apply to all proceedings which have already been issued for possession of commercial premises, including forfeiture on grounds which do not relate to payment of rent.
Does this give the tenant a rent holiday?
No. The liability to pay rent (and all other financial payments under the lease) continues.
Interest also accrues on outstanding rent in accordance the lease terms.
Should I agree to give my tenants a rent holiday or a reduced rent?
You could consider agreeing a rent free period, a reduced rent or changing the frequency of rent payments, for example from quarterly in advance to monthly in advance or in arrear. It is a matter for you based on the commercial realities of your individual situation. Helping tenants to avoid insolvency and to recommence trading as soon as possible has obvious benefits.
You could consider whether there could be other benefits which your tenant might be able to give up in return for granting some kind of concession. For example, could the tenant give up a break option or agree to a longer lease term? Could the tenant agree to document an outstanding or upcoming rent review?
It is also worth thinking about whether you are making any savings by not having to provide services while the premises are closed.
The Coronovirus Act says that a landlord will not waive any rent payments unless the tenant is given an express waiver, in writing. A landlord therefore does not need to be concerned about inadvertently doing or saying something during any negotiations which the tenant might later argue lets it off paying the rent.
Should I document any agreement I reach with the tenant?
Yes. Any concessions are generally best documented in a side letter, but you should also take legal advice about whether a formal Deed of Variation is recommended.
You will need to consider further matters:
- Is the agreement personal to the tenant or should a lawful assignee of the lease also benefit?
- At what point does the agreement end? Will it continue into any renewal of the lease?
- What should happen if the tenant doesn’t comply with the concessionary terms?
- Do you need consent from a superior landlord or anyone with a charge over the property or the lease?
Can I take action to recover the rent now?
Yes, although unless you have a guarantor, most options are unattractive. You can:
- Demand payments from a guarantor
- Consider drawing down an any rent deposit
- Issue proceedings in order to obtain a CCJ
- Serve a statutory demand on the tenant as a precursor to issuing a Winding Up Petition
- Consider whether it might be possible to divert any sub-lease rents
Visits by certificated enforcement agents have been suspended since 23 March so at present you cannot look to recover rent under the Commercial Rent Arrears Recovery procedure.
For more information on any of the points raised in this article please contact Rachel Sims by clicking here.
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