Covid-19 and the recovery of rent arrears: what options do landlords have left?
Update 25 March 2021:
As expected, the Government has announced that the current restrictions on landlords will be extended from 31 March 2021 to 30 June 2021.
This coincides with the recent extension of the restrictions on the use of forfeiture and CRAR. Beyond that, it seems that the Government might well introduce further (but perhaps more limited) restrictions on the use of statutory demands, rather than expose tenants to the immediate risk of insolvency (e.g. the ministerial statement by Lord Callanan, which announced the latest restrictions, mentions the prospect of “aggressive creditor action” had they not been introduced).
In response to the Covid-19 pandemic, the Government introduced (as part of the Coronavirus Act 2020 and the Corporate Insolvency and Governance Act 2020) several restrictions on the options typically used by commercial landlords to recover arrears of rent.
Many landlords have chosen to adopt a collaborative approach and work with their tenants through the pandemic. Rent deferral and concession agreements have become commonplace. But what can landlords do if tenants simply refuse to pay their rent without further explanation, or reach out to them with a request for help?
The following pages provide a quick overview of the options that are still available.
Forfeiture (termination of the lease)
Section 82 of the Coronavirus Act 2020 made it unlawful to forfeit a commercial lease based on the ground of rent arrears. Both methods of forfeiture (peaceable re-entry and the service of court proceedings) became restricted.
The current restrictions are due to end on 30 June 2021. But we think the Government is unlikely to allow a return to the old regime. That would place far too many tenant businesses at risk of failure. Some further changes seem likely.
Commercial Rent Arrears Recovery (CRAR)
The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 made the use of CRAR conditional on a minimum level of rent arrears. But as the threshold is so high, CRAR is not a viable enforcement option in real terms:
- 366 days’ worth of unpaid rent is currently needed to serve a CRAR notice and begin the recovery process.
- 457 days’ worth of unpaid rent will be needed to serve a CRAR notice after 25 March 2021.
- 554 days’ worth of unpaid rent will be needed to serve a CRAR notice after 24 June 2021.
The current restrictions are due to end on 30 June 2021. But as with forfeiture, we think that an unchecked return to the old system is unlikely. Expect some changes here too. One possibility, that the Government might choose to explore, is to exclude the use of CRAR for recovery of any rent arrears that arose before June 2021.
This is the only option that’s still readily available. But the usual commercial considerations of time (the pandemic will inevitably delay the court process to some degree) weighing the cost of litigation against the value of the claim still apply.
We can’t imagine that the option of debt proceedings would ever be withdrawn. However, as part of a wider programme of reforms, it’s certainly possible that the Government might introduce mandatory steps to force landlords and tenants to try and settle their disputes out of court.
The Corporate Insolvency and Governance Act 2020 rendered statutory demands ineffective in real terms. Although they can still be served on defaulting tenants, they cannot subsequently be used in support of winding-up petitions.
We think it’s likely that the current restrictions will be extended beyond the current limit of 31 March 2021 and probably to the end of June. That would coincide with the extension of the restrictions on the use of forfeiture and CRAR. Beyond that, the Government might well introduce further (but perhaps more limited) restrictions on the use of statutory demands, rather than expose tenants to the immediate risk of insolvency.
The Corporate Insolvency and Governance Act 2020 introduced a requirement for creditor landlords to demonstrate a reasonable belief that the tenant’s financial position has not been adversely impacted by COVID-19. Of course, this will be very difficult to do in practice. Most, if not all tenants will be able to prove that their financial position has indeed worsened as a result of the pandemic.