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Arrears recovery in the time of COVID-19 - a landlord’s perspective

Since March, the government has enacted a raft of legislation designed to relieve the pressure on businesses which were struggling to pay their rent during the Covid-19 pandemic. The impact of that legislation on landlords was profound.

Among other things, it prevented them from using forfeiture, bailiff action or issuing statutory demands / winding up petitions to recover unpaid rent. While landlords were therefore unable, in most cases, to take any form of meaningful enforcement action in relation to unpaid rents (whether or not the tenant was actually able to pay), no protection was offered to landlords from enforcement by lenders of their banking commitments, meaning that landlords were – in effect – prevented from protecting their income, while at the same time being required to comply fully with their own obligations.

Landlords were told that the measures were temporary – intended to give tenants some breathing space during periods of forced business closure. However, last month, at a time when most businesses have reopened in some form or another, the government extended the effect of the protections afforded by these laws. So, where does that leave commercial landlords and what can they still do to protect their income and stem further losses?  Below is a summary of the current position.

ENFORCEMENT TYPE

PRESENT POSITION

Forfeiture (by proceedings or peaceable re-entry)

Prohibited for rent arrears until 31 December 2020

Commercial Rent Arrears Recovery “CRAR” (i.e. bailiff / sheriff action)

Rent arrears from March onwards are effectively protected from enforcement by bailiffs until 31 December 2020

Court debt proceedings

Permitted

Statutory demands / winding up

Both prohibited until 31 December 2020, unless a landlord can show a tenant has not been adversely affected by the pandemic.

Action against former tenants and guarantors

Permitted

Draw down on rent deposits

Permitted

Claims against sub-tenants

Permitted provided that it is not inconsistent with the prohibition on CRAR (see above)


Regaining possession

Section 84 of the Coronavirus Act 2020 introduced a moratorium on commencing forfeiture proceedings for non-payment of rent or from peaceably re-entering premises for non-payment of rent. This moratorium has now been extended to 31 December 2020.

Practice Direction 51Z of the Civil Procedure Rules placed a stay on all possession proceedings, which had the practical effect of preventing landlords from obtaining possession in non-rent forfeiture claims, as well as post-lease termination possession actions. That stay expired on 30 September 2020 and there has been no further extension. However, the court is working through a significant backlog of claims and so doing a possession action remains unlikely to bring swift results. Realistically, therefore, this avenue may be of limited practical application for landlords.

Statutory demands and winding-up

The moratorium on the service of statutory demands and on issuing winding-up petitions by landlords against tenants has been extended until 31 December 2020. This is the case unless it can be demonstrated by the landlord that COVID-19 has not had an effect on its tenant’s ability to pay its rent.

COVID-19 has a financial effect on a company if the company’s financial position worsens in consequence of, or for reasons relating to, COVID-19. Many landlords are unlikely to have detailed information about their tenant’s full financial position. It also seems likely that most – if not all – businesses will be able to show that COVID-19 had some adverse impact on its finances. Therefore, this remedy is likely to remain out of reach for most landlords.

Commercial Rent Arrears Recovery (CRAR)

This is the process whereby seven days’ notice is given to tenants before bailiffs enter their premises to seize goods to the value of the outstanding debt. This can be an effective remedy, but it relies on premises being open (which some are still not, post-COVID-19). Under the new rules, a landlord is prevented from using CRAR unless an amount equal to at least 276 days rent is due. For notices served post 25 December 2020, this is increased to 366 days.  Effectively, this creates a moratorium from the March quarter onwards (unless there were rent arrears beforehand).

Court debt proceedings

The government has taken no action to prevent court proceedings being issued for non-payment of the rent. A letter before action from solicitors would be the first step in the process. If payment is not made, the next step would be to issue formal court proceedings for the recovery of the debt.

There are limited bases on which tenants can defend such debt claims. Most arguments being advanced by tenants are designed to stall proceedings and force landlords to negotiate, rather than to provide a genuine defence to a claim. The only real downside to pursuing court proceedings is the time/cost. Legal fees will typically be recoverable from the losing party but, given the length of time it is taking cases to get to hearing, this option inevitably locks-up cash, and landlords will also need to consider, in each case, whether the tenant will – by the time the court process has concluded – be able to pay.  The future risk of tenant insolvency after court action and costs being incurred therefore rests with the landlord.

Post judgment remedies

The government has taken no action to prevent landlords enforcing previously obtained judgments via the usual methods, i.e. obtaining a charging order against a property owned by the tenant, obtaining a third party debt order or appointing an enforcement agent to take control of goods owned by the tenant.

Rent deposits

The government has taken no action to prevent landlords drawing down on rent deposits.  Where rent deposits are held, they can usually be drawn down to cover all or part of the arrears and requests that the deposit is topped up can be made. While the ability to enforce the top-up provisions may in some cases face challenges (e.g. the ability to pay), this remains a very effective remedy for landlords in order to preserve cash-flow (albeit on a temporary basis until the deposit is exhausted).

Former tenants and guarantors

Similarly, the government has taken no action to prevent landlords pursuing claims against former tenants and guarantors. In the right circumstances, it is possible to look to a former tenant or guarantor to discharge any arrears in conjunction with the tenant or, depending upon the wording of the guarantee, instead of the tenant. Note, a notice pursuant to s.17 of the Landlord and Tenant Covenants Act 1995 will be necessary where a claim is being made against a former tenant or guarantor under an AGA. A letter before action would be the first step in this regard.  As with rent deposits, this is a potentially effective remedy, and is also, in many cases, not subject to a cap on liability, meaning that the landlord can seek to claim all sums due from the guarantor for the remaining term of the lease.

Sub-tenants

No direct action has been taken to prevent landlords utilising the procedure laid down by section 81 of the Tribunal, Courts and Enforcement Act 2007, which allows landlords to require subtenants to pay them directly to clear any arrears due from the tenant. However, the rules which prevent landlords using CRAR until a threshold value of arrears has been reached (see above) do come into play here, meaning s.81 is of little practical use for now.

It remains to be seen whether these measures will be extended beyond 31 December 2020 in their current or a paired back form. No doubt landlords, who are themselves facing unprecedented challenges to their businesses, will continue to argue forcefully that it is time for the position to be rebalanced.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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