Protection for businesses with COVID-19 rent arrears: Scottish and English gap

The UK Government’s publication on Friday of a code of practice for commercial property relationships during the COVID-19 pandemic provides useful guidance for landlords and tenants alike throughout all parts of the UK.

The code has been developed with support from the retail, leisure and property sectors and seeks to balance the interests of landlords and tenants. It states that tenants should continue to pay rent in full if they can or pay what they are able to, while encouraging landlords to support businesses where possible.

While adherence to the code is voluntary, the government has also announced that it will extend, until the end of September, restrictions on landlords in England and Wales forfeiting commercial leases or using the commercial rent arrears recovery (CRAR) process. Notwithstanding the code’s encouragement of tenants to pay rent if possible, these measures - taken together with the restrictions on statutory demands and winding up petitions, which will now also have effect until the end of September - have largely removed, at least until October, landlords’ remedies for non-payment of rent south of the border. In effect, in cases where a landlord and tenant cannot reach agreement, whether by reference to the code or otherwise, in the short term the UK Government is prioritising protection of commercial tenants.

The position north of the border is less straightforward. Apart from the restrictions on statutory demands and winding up petitions, which will apply in all parts of the UK, the temporary restrictions on a landlord’s remedies for non-payment in Scotland are less extensive.

Under emergency legislation passed by the Scottish Parliament, since 7 April 2020 the minimum warning period that a landlord of commercial property in Scotland has had to give their tenant before irritating (forfeiting) the lease for non-payment of rent or other sums payable under the lease has been extended from 14 days to 14 weeks. However, unlike in England, there is no moratorium on forfeiture. A landlord can still start the procedure to end the lease, but they must give the tenant just over three months to pay the arrears with interest before they can complete the process.

As the restrictions on business have continued, many commercial premises have been unable to open for trade for nearly three months – and face the prospect of being closed for a few more weeks. At the same time, it is now more than 10 weeks since the emergency legislation came into effect, meaning that some 14-week irritancy warning notices served by landlords may expire within the next four weeks. The Scottish Parliament’s emergency legislation gives the Scottish Government the power to extend the 14-week period by regulation. Although no announcement has been made yet, it must now reasonably be anticipated that the Scottish Government will be considering whether to exercise that power.

The Scottish Government may also be considering whether restrictions should be placed on a landlord’s ability to use summary diligence (various forms of enforcement carried out by sheriff officers) to pursue recovery of rent arrears. Until very recently, there was a practical barrier to landlord’s using summary diligence because the lockdown restricted the activities of sheriff officers. However, as we have now moved into Stage 2 of the Scottish Government’s Roadmap, the sheriff officers’ professional body’s guidance indicates that they are now, once more, able to carry out various enforcement actions.

To date, the Scottish Government has given no suggestion that it intends to restrict the use of summary diligence. That may be a deliberate decision, ie that it considered that preventing winding up petitions and delaying irritancy is enough protection for commercial tenants and properly balances the interest of investors and occupiers. Or it could be that the Scottish Government has yet to find a way to restrict the use of summary diligence for the recovery of rent arrears, without having potentially wide-reaching ramifications in other areas. It may be that the Scottish Government does not consider it likely that landlords will use summary diligence for rent arrears. However, if it is a landlord’s only effective short-term option, why wouldn’t they?

As matters stand, commercial tenants are less protected and landlords have more options in respect of rent arrears in Scotland than in the rest of the UK. Whether, in practice, that will lead to different arrangements being negotiated or landlords and tenants taking different approaches either side of the border is yet to be seen.