The Coronavirus Act 2020 contains a three-month moratorium on landlords’ ability to forfeit leases of commercial property on the basis of non-payment of rent or other sums.
Many landlords are now working with their tenants to find solutions where tenants’ businesses are under threat and rent is only one of many calls on their finances that they may be struggling to meet.
Now that forfeiture is not an option, if an alternative payment arrangement cannot be reached, what action is open to landlords where tenants have not paid their rent?
In the current climate, forfeiture is unlikely to have been the preferred option for any landlord. Taking back a property does not secure payment and the landlord will assume direct responsibility for the property. However, where forfeiture might have been a bargaining chip, what are the alternatives that remain?
- Drawdown against an existing rent deposit – if the tenant has failed to pay the rent it is unlikely to make the top-up payment that may be triggered by draw down, but it will provide an immediate short-term cash-flow fix for the landlord.
- Demand from a guarantor – this may require court proceedings with its associated delays. A direct guarantor may also be trying to support the continuation of the tenant’s business and itself seek to delay/reduce payment. If there is an authorised guarantee agreement the landlord can demand payment from the former tenant provided it follows the relevant procedure although, again, it is unlikely to produce results quickly.
- Statutory demands – the effect of a statutory demand is that if the tenant does not pay the rent due within 21 days and (if an individual) fails to apply to have it set aside or (in the case of a company) fails to apply to restrain presentation of a winding-up petition, the landlord may present a petition to the court for a bankruptcy or winding-up order. The threat to a tenant’s solvency may be sufficient to prompt payment but the process itself will be subject to inevitable court delays and it is reported that the government is considering imposing a moratorium on issuing petitions.
- Commercial rent arrears recovery – building closures and restrictions on individuals’ movements mean this is unlikely to be a practical option due to the requirement for physical entry and the subsequent liquidation of assets.
- Debt recovery proceedings – court process may be slow and enforcement of the judgment is still likely to be required with all its associated difficulties.
Any action taken by landlords, particularly the statutory demand, may be reported as an aggressive move. Publicity has centred on struggling operational tenants, many of which were experiencing a difficult trading environment prior to the current crisis, but landlords have staff to pay and banking covenants to meet, and many will have insufficient cash reserves to cover these without the anticipated income from their tenants.
The questions remain: what support is there for landlords from government? Or is the pressure on lenders and landlords to find their own solutions?
Sarah Ferguson and Laura Southgate are partners at Cripps Pemberton Greenish