When it comes to commercial property disputes, our specialist team of solicitors often advise that disputes can be prevented at the contractual and agreement stages – as long as proper drafting and thorough checking or negotiating of the lease or sale/purchase documentation is undertaken. However, as can sometimes be the case, circumstances change and sometimes problems are unavoidable. This is particularly true considering the Covid-19 pandemic, and specific legislation was drafted to try and help landlords and tenants manage disputes at this time of great financial hardship and uncertainty.
In this FAQ-style guide to commercial property disputes, we’ll be covering some of the most common situations where disputes can arise. This will enable you review potential pitfalls and be equipped with details of how we can help.
Commercial rent arrears
The consequences of a commercial tenant falling into rent arrears usually depend on the terms of a lease, but on 16 June 2021 the government provided some reassurance for tenants by confirming that there will be ongoing breathing space for businesses who have struggled to pay rent during the pandemic. The press release issued by the government can be found on the government website. The key points that you need to be aware of are as follows:
- It has been made clear that if you are in a position to pay your rent, then you should continue to do so where possible.
- The ban on forfeiture for failure to pay rent will be extended to 25 March 2022. To be clear, ‘rent’ does not just mean annual rent, but also includes any amounts payable under the lease, so be mindful that this can include service charges and insurance. It’s also important to highlight here that a landlord’s right to forfeit for non-payment of rent is expressly preserved and cannot be waived unless such waiver is given in writing. Practically speaking, this means that commercial landlords will be able to take immediate forfeiture action when the restrictions are lifted in respect of unpaid rent, should they wish to do so.
- The Covid-19 legislation will not apply if your commercial lease is for a term of less than six months.
- Your landlord cannot use your failure to pay rent during the pandemic as a basis for opposing the renewal of your lease under the Landlord & Tenant Act 1954.
- The restrictions on using the Commercial Rent Arrears Recovery procedure (‘CRAR’) are also to be extended from the current position, which stipulates that the landlord can only use CRAR if the tenant is in arrears of more than 457 days. On 24 June, this rose to 554 days from the next quarter day.
- The moratorium on serving statutory demands and issuing winding up petitions will both be extended to 30 September 2021.
- Landlords are still able to take steps to enforce a tenant’s liability under the lease, by means of contractual enforcement or debt recovery action via the issue of court proceedings.
- It’s expected to be the case that any arrears that have accrued directly due to the Covid-19 pandemic will be ringfenced. Further guidance on this is awaited.
Whilst the government is yet to produce a draft Bill off the back of this guidance, the key takeaway to bring to your attention here is the need to keep the channels of communication open with your landlord if you are struggling to meet your rent payments due to coronavirus.
What is adverse possession?
Adverse possession is when a person who is not the legal owner of the land can become the legal owner by possessing the land for a specified period of time.
If the land is unregistered, the individual must have been in possession without the owner’s permission for 12 years before they apply to register their interest with Her Majesty’s Land Registry (‘HMLR’). Usually this is supported by either a statutory declaration or a statement of truth.
If the land is registered, the individual must have been in possession without the owner’s permission for 10 years before they apply to register their interest with HMLR. If their application isn’t successfully opposed, the applicant becomes the owner of the property.
What is a dilapidation claim?
A dilapidation claim is a claim made by the landlord against an outgoing tenant for breach of repair covenants. How the pandemic will affect the way dilapidation and repair claims are dealt with remains to be seen, however, the broad position is as follows:
- It’s common for leases to specify a standard of repair and maintenance of the property as a schedule of condition annexed to the lease. This sets out who is responsible for repairs and maintenance. Where the tenant has failed to maintain these standards by carrying out relevant repairs, decoration, and other structural work, the landlord has two options.
- Firstly, the landlord may require you to carry out the work to bring the property up to the required standard. If this is the option they choose, it’s important for the landlord to begin investigating and inspecting the property before the lease comes to an end. This will give you sufficient notice so that you can undertake the repair work and complete it before leaving.
- The alternative option is that the landlord may ask you to pay damages for your breach of the repair or maintenance covenant in the lease. This will allow the landlord to recover damages for carrying out the repair or maintenance work themselves and for any loss of rent resulting from having to carry out this work. It’s important to note that the damages received from a tenant for breach of the repair or maintenance covenant cannot exceed the difference in the value of the property in its condition at the end of the lease, and its value if you had not breached the aforementioned covenant.
- It’s also important to note that the landlord won’t be able to make a dilapidation claim if they intend to redevelop the property, such that the property will be demolished or substantially altered.
What happens if my commercial landlord becomes insolvent?
If your commercial landlord becomes insolvent, it’s likely that the liquidator will want to take the property and sell it. The first time you may be put on notice of this happening is when the insolvency practitioner appointed to begin the formal insolvency process contacts you via letter. You may be asked to continue paying your rent, but to a different bank account.
In practice, this should mean that you’re able to continue occupation under your lease, but the landlord will change when the freehold of the property is sold to another party.
In such circumstances, the tenant has the right of first refusal under the law in England and Wales. This means that you are given the chance to buy the property before the liquidator can sell it to a third party. This is known in technical terms as the ‘leaseholders’ collective first right of refusal’.
It’s also possible for the liquidator to disclaim the freehold because it is an ‘onerous property’ – in other words, it might hold little or no financial value. This relieves the liquidator from responsibility and liability for the premises. The property subsequently becomes property of the Crown and you as the tenant can continue occupation under the original lease.
Where the commercial property becomes property of the Crown, there will no longer be a landlord responsible for maintenance and repair. You can overcome this problem by applying to the First-tier Tribunal (‘FTT’) for a formal appointment of a manager and receiver. Since this is a complicated process, it’s highly recommended that you seek legal advice when doing so, something which our commercial property team can assist you with.
What happens if I become insolvent as a commercial tenant?
The usual position is that if, as a tenant, you become insolvent, it’s likely that the lease will define this as an event of default. In such circumstances and in the ordinary course of things, the landlord would be able to serve notice on you, which in turn terminates the lease.
If the you owe money to your landlord under the lease, the availability of remedies will be dependent on the insolvency proceedings against you. The landlord may be able to rely on the CRAR procedure, or may draw down on any rent deposit, seek payment from a guarantor, serve a statutory demand, or issue court proceedings.
This being said, there will inevitably be a need for you to take specialist legal advice as to the most up-to-date position in relation to your commercial lease in the event that you become insolvent, as the status quo will be affected by the current coronavirus guidance and legislation in force at the time.
What commercial property dispute resolution services we can help you with?
At Harper James, we offer both a specialist commercial property dispute service and general business dispute resolution, with lawyers working across both areas to achieve the best outcome for our clients. Find out more about the kinds of commercial property disputes, we can help with and what business dispute services we offer.