The last year has seen a series of extensions to the measures put in place to protect tenants against remedial action by landlords in respect of rent arrears. After stating that the previous extensions until 31 March 2021 and 30 June 2021 were the ‘final’ extensions in favour of tenants, last week (16 June 2021) saw the announcement by the government of a nine month extension (the longest yet) until 25 March 2022 which came as a surprise to the property industry.
Notably, a new scheme is proposed to support tenants who were impacted by closures. It is intended that rent arrears built up during the periods of enforced closure due to the pandemic will be “ring fenced” in respect of which landlords are expected and encouraged to share some of the burden by agreeing payment plans and reductions. Under the proposals, where the parties cannot reach an agreement, disputes between landlords and tenants will be subject to a binding arbitration process before taking the matter to court.
The ban on a landlord’s right to recover rent by seizing a tenant’s goods under the statutory Commercial Rent Arrears Recovery (CRAR) procedure has also been extended until 25 March 2022, however it will remain the case that 554 days’ (approximately six quarters’) rent needs to remain unpaid for a landlord to exercise CRAR.
Regulations are also intended to be introduced extending restrictions relating to pandemic related debt via the issue of statutory demands and winding up petitions for a further three months, until 30 September 2021. It remains to be seen whether this will be extended further until 2022.
The Government stated that these extensions are to afford tenants who can open enough time to come to an agreement with their landlords without the threat of eviction.
This is, on the one hand, supportive news for commercial tenants as it affords a notable period of further breathing space during a time where some landlords would have been preparing to take forfeiture action, however, on the other hand, many landlord and tenants have already agreed settlements or enforcement action has been taken within the remit of the current rules.
The Government reiterated its encouragement for tenants to continue paying rent where they are able to and for landlords and tenants to seek to negotiate and resolve disputes in connection with rent arrears.
A more detailed position is set out below which is an update on our previous blog posts written on the 3rd December 2020, 25 February 2021 and 19 March 2021.
Key issues for commercial tenants until March 2022
What is the current position for commercial tenants?
At the start of the pandemic in March 2020, we saw the first moratorium put in place under the emergency legislation of the Coronavirus Act 2020 which, amongst other things (further details in a previous note we prepared can be found here), sought to protect commercial tenants by introducing a ban on a landlords ability to forfeit a lease in the usual way due to the existence of arrears. The initial moratorium was due to end in June 2020, however, it has been extended several times since, the most recent and notable one being until 25 March 2022.
Why does it matter to my business?
If your business is struggling to pay its rent and has fallen into arrears, then landlords have been placed under restrictions for an extended period regarding the tools they have to enforce the rent arrears against your business. The most notable restriction being the ability to end the tenancy and your business’ right to occupy the premises via taking peaceable re-entry of the premises (subject to the terms of the tenancy agreement) which is banned until 25 March 2022. From a commercial tenant’s perspective, this is obviously quite a harsh remedy given the direct and immediate impact, so the extension will no doubt be welcome news to tenants in these circumstances.
It may encourage landlords who have not been minded to negotiate to date, to finally come to the table and do so. On the other hand, it may mean that they look to other remedies available to them, so be mindful you do not have a full suite of protection as a tenant. We have set out within the section “What else should we be mindful of?” below other remedies that landlords still have available.
If your business is one which has been forced to closed during the pandemic, then rent arrears, incurred during this forced period of closure will be “ring fenced” which means that special rules apply to them. The full details are awaited as it’s only a proposal at this stage but it is understood that parties will beexpected to agree to share the financial burden of this unpaid rent, and where an agreement cannot be reached the parties will be subject to a new, binding arbitration process. Landlords have been warned to make provisions for this. There are, however, lots of unknowns at the moment as to how the proposed rules will be interpreted and implemented in practice.
We occupy under a shared space agreement – does this impact my business?
There are a number of occupational arrangements that these rules do not and have never applied to and this is one of them. If your business occupies a shared space type office (e.g. a “WeWork” space) it is more likely that you occupy pursuant to a “licence” rather than a “tenancy” (however, it is worth seeking advice to check if this is the case as it can be a grey area). In which case, the moratorium has never applied to such agreements and the space provider’s remedies won’t have been altered. The agreement between your business and the space provider will determine the position and any penalties regarding arrears and you should seek advice as appropriate.
What about the Debt Respite Scheme – can this help?
As this applies to individuals, it is unlikely that in the context of commercial rent arrears that it will be of any assistance. It is possible that, if you have provided a personal guarantee for a commercial tenancy which is being enforced by your landlord and you are unable to pay, you could potentially qualify.
The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium( (England and Wales) Regulations 2020 came into force on 4 May 2021.
The criteria and relevant rules are very detailed and you should seek specific advice if you this is something you need and that you could qualify for, but in very headline terms the Debt Respite Scheme involves:-
- The Breathing Space Moratorium. The individual in debt must firstly obtain debt advice from an approved debt advisor, then it will be eligible to make an application for the moratorium to an approved debt advisor. The debt advisor will consider the application and assess if the applicant is eligible and, if so, it will initiate a 60 day moratorium period in respect of qualifying debts.
- The Mental Health Crisis Moratorium. Again, the individual has to apply and they will only be eligible if they are receiving qualifying mental health crisis treatment. Evidence of such treatment must be submitted and has to be provided by an approved mental health professional. If successful, the debt advisor will initiate the moratorium in respect of qualifying debts which will remain in place until either 30 days after the individual stops receiving mental health crisis treatment, 30 days after the debt advisor makes a request of the individual’s nominated point of contact but does not receive a response, if the moratorium is cancelled or if the individual dies.
What else should we be mindful of?
It is important to be aware that a landlord still has a number remedies at its disposal, some of which have also been restricted, some which are due to be relaxed at different junctures and some of which have never been restricted.
Remedies available to a Landlord are currently as follows:
- Forfeiture: It is prudent to note that forfeiture is still available for breaches other than non-payment of rent e.g. failure to disrepair. The process involves the service of a what is known as a “section 146 notice” and, where breach remaining unresolved, Court proceedings would follow.
- CRAR: The Commercial Rent Arrears Recovery process (similar to the old rules of “distress”) enable a landlord to recover tenant goods in lieu of rent arrears. This has still been available during the pandemic, but in a more limited way for landlords as the timeframe for outstanding rent arrears before recovery action can be taken has been altered. This limitation was extended in the most recent update until 25 March 2022 but the requirement for 554 days’ (approximately six quarters’) rent to be unpaid remains and has not been extended (unlike in all previous updates to the regulations) in order for a landlord to exercise CRAR. That 554 day period is not being extended further on the basis that it is the length of time between 25 March 2020 and 28 September 2021, so a tenant who has paid no rent since the start of the pandemic will need to start paying rent again from this September’s quarter to avoid CRAR. The usual non-pandemic related period is 7 days.
- Rent Deposits and Guarantors: It is still possible for landlords to draw down on tenant rent deposits or enforce against guarantors under the tenancy.
- Debt Recovery Proceedings: It is still possible for landlords to issue a claim at Court for the recovery of rent arrears as a debt.
- Statutory Demand & Winding Up Petition: Under the Corporate Insolvency and Governance Act a moratorium exists on presenting winding up petitions where the pandemic has had a financial effect on a tenant / debtor and there are plans for this to be extended from 30 June 2021 for a ‘further three months’ until and anticipated 30 September 2021. It remains to be seen whether this will be extended again to March 2022 to align with the forfeiture rules. In theory, under the legislation, it is still possible to present a winding up petition where a landlord/creditor can demonstrate reasonable grounds for believing that the pandemic has not has a financial effect on the tenant company, however, there is an evidential burden upon the landlord and one which may be difficult to prove.
How can Ignition Law help commercial tenants?
We are happy to help and support you, which we can do in a number of ways. In the context of the potential moratorium lift explained above we can:
- Advise you regarding your landlord’s remedial options against you in respect of any arrears and how you can mitigate any risks.
- In the event of any remedial action being threatened or taken by your landlord, help you navigate through the process and review the validity of your landlord’s action.
- Help with settlement negotiations.
- Draft a settlement or surrender agreement.
If you have any questions please contact Lauren O’Sullivan.