Current estimates indicate that the total commercial rent arrears between the March and December quarters in 2020 reached £4.2 billion. With the current moratorium on forfeiture due to end on 30 June 2021, commercial landlords are having to look at their options very seriously.
Current Legislation
The current position for commercial landlords is as follows:
the moratorium on forfeiture of commercial leases remains in place until 30 June 2021 (having previously been extended four times), under Section 82 of the Coronavirus Act 2020;
there are additional restrictions on statutory demands and winding up petitions under the Corporate Insolvency and Governance Act 2020;
there are additional restrictions on Commercial Rent Arrears Recovery (i.e. seizure of tenant’s goods).
Guarantors
Another option available for landlords is recovery of rent from any current or previous guarantors. However, if the landlord is seeking to recover rent under an Authorised Guarantee Agreement, from a previous tenant, they will need to serve notice under Section 17 of the Landlord and Tenant (Covenants) Act 1995, within six months of the rent falling due. A former tenant (or guarantor) may also be entitled to an overriding lease if they are called on to make payment to the landlord.
Rent Deposits
The landlord may also be entitled to drawn down on a rent deposit. However, the terms of this would need to be checked carefully and there is a potential risk, during insolvency, if the deposit is held by a third party as stakeholder. In addition, if the tenant enters into a Company Voluntary Arrangement (CVA) it is possible that the terms of the CVA may release the tenant from its obligations under the lease, which could affect the landlord’s position under a rent deposit. Alternatively, if the tenant enters into Administration, the occupation of the premises may form an expense of the Administration, in which case, the landlord may want to retain the deposit.
Code of Practice
On 19 June 2020 the Government published the Code of Practice for commercial property relationships during the COVID-19 pandemic, which has subsequently been updated. This is intended to encourage the parties to act reasonably during the pandemic and, where possible, negotiate.
Court Proceedings
Finally, the landlord would still be entitled to issue court proceedings to recover rent arrears. Two recent cases, in which the tenant sought to argue various issues that arose due to the pandemic, have both come out favourably for the landlord:
Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd; and
Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others
In these cases, the court rejected arguments that the landlord was in breach of the Code of Practice and also arguments over frustration. These judgments should provide confidence to landlords that the landlord can still recover rent arrears, even during the current pandemic.
Next Steps
The position, both in terms of any extension of the moratorium on forfeiture and/or transitional period, is currently uncertain. However, landlords should be cautions, once the moratorium ends, not to do anything to waive previous breaches (including rent arrears) and further arguments could arise over allocation of future rent, which could affect the landlord’s ability to forfeit. Whatever the position, once the moratorium ends, the commercial property market is likely to face significant upheaval, both in terms of litigation and also negotiations, where both landlords and tenants are seeking to protect their commercial interests, following an unprecedented period for commercial property.
For advice on any of the above please contact our Property Litigation Team.
