Managing a relationship with a tenant who is in rent arrears can be extremely difficult. If a tenant is unable or unwilling to pay their rent it can put a significant financial strain on your business.
The legal landscape has changed considerably for commercial landlords since covid. New legislation was introduced during the pandemic, giving tenants additional protection from landlords.
In this article, our Insolvency solicitor Eleanor Stephens, discusses the current options available for commercial landlords wishing to claim rent arrears for periods affected by covid.
Let’s look at the general remedies for commercial landlords.
- Forfeiture: A landlord can end a lease as a result of a tenant’s failure to pay rent.
- Possession proceedings: A landlord can apply for possession of the property following a breach of lease conditions, such as failure to pay rent.
- Commercial Rent Arrears Recovery (CRAR) and taking control of goods:
This is a regime which allows landlords of commercial premises to seize a tenant’s goods from the premises in order to meet unpaid rent.
- Debt recovery proceedings for rent arrears: A landlord can apply to court to recover arrears from a tenant who has failed to pay.
- Rent deposit: A landlord can use money previously deposited by a tenant as security against non-payment of rent and other breaches of a lease.
- Guarantor: A landlord can seek rent arrears against a guarantor
- Statutory demand: A landlord can issue a formal demand for payment of a debt by way of a statutory demand. Failure to pay means that the tenant can be presumed to be insolvent, and a landlord can commence insolvency proceedings against the tenant.
What changed for landlords and tenants during covid?
As a result of temporary legislation brought in to provide some respite for commercial tenants who were struggling with payment of rent due to the lockdown and associated problems, many of the usual remedies available to landlords set out above were put on hold for a temporary period.
For example, no proceedings for possession in relation to commercial property were allowed from 27 March 2020 to 20 September 2020. Business tenancies could not be forfeited from 26 March 2020 until 25 March 2022, and landlords were prevented from taking control of goods for commercial rent arrears recovery from 25 April 2020 until 25 March 2022.
What is the current situation for landlords wishing to claim rent arrears for periods affected by covid?
Following the end of most of the existing temporary periods, the government brought in some additional temporary measures, this time under The Commercial Rent (Coronavirus) Act 2022 which extends some of the protections given to commercial tenants by providing a protective ringfence around rents and service charge debts which are still outstanding having accrued during the period when premises were forced to close during lockdown.
Those rent arrears are called ‘protected rents’ and are to be treated differently from all other rent arrears that have accrued.
For all arrears relating to ‘protected rents’, tenants and landlords now have the option of referring those debts to an independent arbitrator to decide what to do about them. They must do this within 6 months of the measures coming in, so between 24 March 2022 to 24 September 2022, and those rents are protected during this period, or until any arbitration is concluded. This means that landlords are prevented from taking action to recover these protected arrears while the arbitration process is in place, even if it brings the time frame past 24 September 2022.
While tenants are still liable for all those protected rents, depending on the circumstances, an arbitrator may order that the protected rents are written off in full or part, or may give the tenant more time to pay, or suggest the rent is paid off by instalments over a period of up to 24 months, and/or they could order that the landlord reduce the interest payable on the debt.
Landlords are encouraged to agree a solution with tenants before a reference to arbitration is made – mainly in order to save costs, as arbitration sessions can be expensive. While a tenant may prefer to go to arbitration, which might well assist them if they can demonstrate the viability of their business and that they cannot afford to pay, it is not an ideal solution for tenants due to the cost of involving an arbitrator, and the possible negative publicity. All of this can be used by a landlord in trying to reach agreement on these arrears outside of the arbitration process where possible.
What is a ‘protected rent’?
Protected rent debts are rent, service charge, interest and VAT due under a tenancy to which Part II of the Landlord and Tenant Act 1954 (LTA 1954) applies (so not relevant to sub-let premises), covering the period when the whole or part of the business or premises were required by coronavirus regulations to close.
The protected rents are only protected if they accrued during the period of closure as a result of government rules. So, the maximum period is from 21 March 2020 (when lockdown came into play) to the earlier of either the last day the business or premises were required to close or were subject to regulation as to how the business was run, or in England 18 July 2021 and in Wales 7 August 2021.
What is prohibited during this period for a landlord?
During the time this temporary extension is in place, i.e between 24 March 2022 to 24 September 2022 or until arbitration is settled:
- A landlord may not draw down on a rent deposit in respect of a protected rent debt. Where the landlord has already lawfully drawn down on the deposit before the restriction was in place, the tenant will not be required to make good any shortfall in the deposit before the restrictions end.
- Landlords are prevented from forfeiting a lease in respect of a protected rent debt during this period.
- A landlord may not take debt recovery proceedings for the protected rent arrears.
- A landlord may not take control of goods to meet protected rent arrears under the Commercial Rent Arrears Recovery process.
- A landlord may not issue a statutory demand for the protected rent arrears.
- Action against a guarantor or former tenant is restricted.
What are potential alternatives to using the arbitration scheme?
A landlord could agree by negotiation a settlement to enable the protected rent to be paid without resorting to arbitration. For example, a landlord could grant a temporary rent concession to the tenant for the unpaid protected rent, such as a reduction in rent, or might agree to waive default interest on late payments.
A landlord and tenant could agree a schedule for repayment for arrears.
The tenant could look into whether there is any government assistance available for them which might help to cover the unpaid rent, or whether they might have business interruption insurance which would cover rent during that period.
The landlord and tenant could agree that the landlord use any deposit to cover this accrued rent – perhaps with an agreement that the tenant does not have to top up the deposit until an agreed future date.
If there is a guarantor that can be called upon to pay the rent, then perhaps this is an option by agreement.
If the property is likely to be rented again easily, the landlord might agree with the tenant to accepting a surrender as an alternative option.
There can be no doubt that these new additional restrictions mean that the problems landlords have had to face with covid restrictions on claiming unpaid rent arrears must continue for a little while longer.
However, there is an end in sight now for landlords who have lived with rent arrears for a long time now, and the introduction of an independent arbitrator can mean that a landlord can put their case for hardship in the same way as can a tenant. These new provisions also strongly urge landlords and tenants to reach agreement before going to arbitration, which can focus the mind and lead to a resolution of a problem that has remained unresolved for many months.
If you a commercial landlord and currently have a tenant that is unable or unwilling to pay their rent we suggest you urgently seek legal advice. Ignoring the issue or attempting to deal with the problem yourself without speaking to an insolvency professional could potentially make the situation worse. Our Insolvency team can act on your behalf, ensuring you get the best result for your business.
For further information about insolvency, see our related Knowledge Hub articles and guides.