Further changes to landlords’ remedies for recovering commercial rent arrears
Two of the classic self-help remedies open to landlords for recovering rent arrears have traditionally been forfeiture and Commercial Rent Arrears Recovery (CRAR), but both of these are now restricted as a result of Government measures to support tenants during the coronavirus crisis.
The Regulations changing the use of CRAR came into force on 24 April and now apply to enforcement action taken under that process. The Government has also announced its intention to introduce temporary restrictions on statutory demands and winding up petitions, apparently retrospectively. We still await further detail about the proposed changes to insolvency procedures, although reports are already emerging as to the effect they are having.
This briefing note covers:
- the new CRAR Regulations;
- the proposed changes to insolvency procedures and the impact they are already having; and
- the amendments made to the restrictions on possession proceedings.
New CRAR Regulations
The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 provide three key changes (although only the first is really headline grabbing):
- An increase of the threshold before CRAR can be exercised in the first place – from 7 days’ rent arrears to 90 days, for enforcement notices given between 25 April and 30 June 2020;
- An extension, in certain circumstances, to the date by which an enforcement agent must have taken control of goods if the notice of enforcement is not to lapse; and
- An extension of the 2 year enforcement certificate that enforcement agents must hold in order to act in that capacity (again, in certain circumstances).
The increase in the level of unpaid rent required for CRAR (paragraph 1 above) effectively means that a tenant must owe at least one quarter’s rent.
Proposed changes to insolvency
The Government announced on 23 April that it intends to:
- ban the use of statutory demands between 1 March – 30 June 2020; and
- restrict winding-up petitions between 27 April – 30 June 2020.
The press release refers to the restrictions applying “where a company cannot pay its bills due to coronavirus”, but there are no details as to how this test will be applied by the courts. The relevant provisions are expected to be included within the Corporate Insolvency and Governance Bill, which has not yet been published. The lack of legislative detail means continuing uncertainty for landlords and tenants, particularly given that the Government’s announcement refers to statutory demands and winding up petitions already issued being “temporarily voided”.
Despite this lack of detail and/or any legal weight behind the Government’s announcement, there has already been some interesting reliance upon it. At a very basic level, there are reports of process servers now refusing to undertake the service of certain demands and petitions. More notably, the High Court granted an injunction on 29 April to prevent a landlord from bringing a winding-up petition against a retail business. In that case (which is subject to a privacy order), the court was prepared to take into account the impending legislation as part of its consideration of the circumstances.
Nonetheless, the very recent case of Re Saint Benedict’s Land Trust; Re Shorts Gardens (27 April 2020)shows that the courts are likely to be alert to businesses seeking to take advantage of the new measures. In that case, the High Court rejected the debtor’s attempt to rely on the Government announcement to prevent a winding-up petition being presented and suggested that the measures were not intended to extend to:
- entities such as the debtors, who were not tenants in the retail or hospitality industry; and/or
- petitions based on debts other than arrears of rent (the debts in this case related to outstanding court orders and long-standing arrears of rates).
Both this case and anecdotal evidence suggest that the courts are focusing their attention on attempts to use insolvency processes to recover rent arrears. This view is supported by the fact that winding-up petitions have been issued for non-tenancy debts since the Government’s announcement on 23 April.
The government has indicated that, once passed, the legislation will be in force until 30 June with the possibility of this period being extended if appropriate (together with the moratorium on forfeiture – further detail below).
The objective behind the proposed changes outlined above is apparently to protect high street shops and other companies under strain “from aggressive rent collection” and the government has suggested that these entities will be “asked to pay what they can”. This opens up as many questions as it does answers and is unlikely to address landlords’ concerns that they have their own financial obligations to meet and also cannot forego income indefinitely. The government has stated that it understands the “serious pressures” on landlords and is “working with banks and investors to seek ways to address these issues and guide the whole sector through the pandemic”, although it remains to be seen whether landlords will be given any additional support.
In the meantime, the government has encouraged landlords and tenants to cooperate “in the spirit of fair commercial practice”. Although the government seems intent on giving tenants some breathing space during the current crisis, it has called on them to “pay rent where they can afford it or what they can in recognition of the strains felt by commercial landlords too”. However, there is a lack of guidance as to what this means and it remains to be seen how tenants will respond to this call when so many failed to pay their March quarter’s rents.
There seems little doubt that these new restrictions will hamper landlords in pursuing certain actions to recover rent arrears but this does not mean that tenants are entirely out of the woods either – none of the changes so far affect the underlying amount that tenants have to pay. Indeed, many tenants may not appreciate the risk that their leases may enable them to be charged interest as well as any costs incurred on addressing the failure to pay rent. For example, with any court proceedings issued to recover arrears of between £10,000-£200,000, the standard court issue fee is 5% of the claim value and there will be legal costs in addition to this which the tenant may well be ordered to pay. There is also the fact that the moratorium on forfeiture is currently due to end on 30 June, which means that landlords may be able to take action at that time and insist on payment of two quarters’ rent (to include 24 June).
Update on forfeiture moratorium
Ever since the Coronavirus Act 2020 came into force on 25 March, a moratorium has been in place preventing the forfeiture of commercial leases for unpaid rent – currently due to expire on 30 June 2020. This does not affect the ability of landlords to take steps as a prelude to forfeiture in connection with other breaches of covenant, e.g. subletting, disrepair etc. Section 146 Notices in respect of such breaches remain a valid approach in the enforcement armoury open to landlords. However, the practical impact of such an approach is severely limited by the Practice Direction (51Z) which stays most possession cases (and their enforcement) for a 90 day period from 27 March until 25 June 2020.
On 18 April, the Practice Direction was amended to clarify that the following cases should be exceptions to the stay on possession proceedings:
- Possession claims against trespassers within the meaning of CPR 55.6; and
- Applications for an interim possession order under Section III of CPR Part 55.
Just as importantly, the amendments also confirmed that:
- the stay of proceedings imposed by the Practice Direction does not preclude the issue of claims by the court – claims should be issued but will then be stayed;
- parties to possession proceedings can make applications for case management directions which are agreed by all the parties (so that proceedings can resume effectively once the 90-day stay has expired); and
- the Practice Direction will cease to have effect on 30 October 2020.
Again, the breathing space given to tenants during these unprecedented times offers only limited assistance. Tenants need to bear in mind that (a) the Practice Direction and legislation delaying forfeiture is time-limited; (b) it seems unlikely that the moratorium will be extended indefinitely; and (c) well-advised landlords will look to ensure that all relevant pre-action steps have been taken (e.g. serving Section 146 Notices, appropriate warning letters etc.) so that they are well-placed to enforce their rights once the current legal limitations have ended.
The (amended) press release relating to the proposed changes to insolvency can be found here.
The proposed changes to insolvency build on the announcement towards the end of March that the Bill will also include temporary measures to give businesses more breathing space – read more.
For an outline of the restrictions on the forfeiture of business tenancies introduced on 25 March, please click here.
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