Leases in the time of Coronavirus: Non-payment of rent, forfeiture, CRAR and debt recovery

Our team: Gavin Whitney

No doubt as owners and occupiers of commercial premises, the Covid-19 pandemic has caused numerous issues but one of the biggest concerns is likely whether or not rents are paid. In this article, we will consider the remedies available to a landlord and also look at what action the Government has taken, or which is being considered, to address them.

For many occupiers who want to keep their premises, forfeiture is their main concern. Also known as the right of re-entry, forfeiture allows a landlord to terminate a lease for breach by the tenant of its covenants. The right of re-entry applies to all tenant covenant breaches but the non-payment of rent is given “special” treatment. Whereas other breaches require the landlord to first serve notice on the tenant giving them time to remedy, there is no such requirement in the case of non-payment of rent and landlord can simply change the locks and take the premises back. However, section 82 of the Coronavirus Act 2020 has temporarily changed this historic position. Under that Act, there can be no forfeiture for non-payment of rent until 30 June 2020, but possibly much later if extended by the Secretary of State. Rent includes any sum a tenant is liable to pay under a commercial lease, including service charge, insurance rent and other sums. However, the landlord retains its other remedies.

Debt recovery
Instead of making use of the proprietary right (i.e. relating to property) of forfeiture, the landlord could simply sue the tenant for the debt as it would sue anyone who owed it money. Issuing proceedings is more difficult at the moment given the social-distancing rules and impact on staffing at the courts but it remains a cheap and fairly simple method of recovering debts. In addition, if the tenant does not pay, the landlord has the option of service of a statutory demand and then applying to wind up or bankrupt the tenant i.e. make it insolvent. Proposals are being discussed to suspend this right temporarily for situations arising from the Covid-19 pandemic but no legislation has yet been passed.

Commercial Rent Arrears Recovery
Another option open to a landlord where a tenant has valuable stock or equipment is the use of commercial rent arrears recovery (CRAR). CRAR allows a landlord to instruct an enforcement agent to take control of a goods at the premises belonging to one its tenants and realise the value of them to settle debts owing to it. There are procedures that the landlord must follow in order to do this; in particular, the enforcement agent cannot break and enter the premises and will need a court order if they are closed (which is likely, during the pandemic) and so this may make use of CRAR more difficult at the moment. CRAR only applies to non-payment of rent and not to other sums due under the lease, such as service charge. No changes are proposed to this regime at present as a result of the Covid-19 pandemic.

Rent deposit
If there is a rent deposit in place, a landlord is likely to immediately utilise the funds secured by this to meet any liabilities for unpaid rent; usually a landlord only has to give short notice of its intention to do this. A landlord is then entitled to ask the tenant to “top up” the deposit and failure to comply with this request is effectively another breach of the terms of the lease. Therefore, if a tenant has paid a rent deposit it may be more likely to pay the rent so as not to lose its deposit and face another demand for monies.

Non-payment of the rent and other sums under the lease is likely to mean that a landlord is entitled to charge interest on the unpaid sums at a penal rate (i.e. above the base rate) until payment is made. Obviously, this doesn’t help a landlord actually get the sum back but it is worth bearing in mind that interest will be running on unpaid sums even though a landlord cannot forfeit the lease.

Whilst Government has taken action to prevent eviction of commercial tenants from their premises, landlords still have other remedies in their arsenal, some of which are quite potent. Some landlords and tenants are coming to arrangements over this challenging period such as agreeing a payment holiday or changing from quarterly to monthly payments. Any such arrangement should be documented carefully and so please contact us for assistance with this.

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