COMMERCIAL PROPERTY - How can you recover your unpaid rent from tenants who cannot or will not pay you because of Covid-19?

COMMERCIAL PROPERTY - How can you recover your unpaid rent from tenants who cannot or will not pay you?

Your business tenant is not paying his rent – how can you get your money?

What is the problem?

Our landlord clients tell us that many of their commercial tenants are not currently paying the rents due under their leases – in most cases, their tenants have defaulted on the rent payments falling due on 25 March and 24 June despite the Government encouraging tenants to pay “what rent they can afford”.

These tenants, and indeed most landlords, seem to believe that they are protected because of a range of new measures introduced by the Government to meet the pandemic crisis and that there is nothing that can be done by their landlords. In this article we explain some of the steps landlords can take to recover the monies due, particularly when some of these tenants are not in real financial difficulty and may simply be taking advantage of the situation.

What could you have done before March?

There were a number of possible remedies available to you before these new measures were introduced:

  • Forfeiture of the lease – provided that the lease is in writing and includes an express provision entitling a landlord to re-enter or to forfeit the lease for non-payment of rent (as any properly drafted business lease will), you are entitled to re-enter the property and to take possession, bringing the lease to an end. Although this also crystallises the rent arrears figure, it then allows you to re-let the premises to another tenant. The threat of forfeiture was often enough to persuade a tenant to pay the rent. In some cases, a tenant can apply to the court for relief from forfeiture and the court can allow that tenant to continue in possession of the property under the lease, subject to terms including the clearing of arrears and the payment of costs.
  • Commercial Rent Arrears Recovery (CRAR) – you can send in enforcement agents to seize a tenant’s assets equivalent to the rent owed and to sell them.
  • Service of a Statutory Demand – a demand, which, if not paid within 21 days, could found a Bankruptcy application or a Winding Up Petition. The debtor is usually a company, in which case the debt must be for at least £750, and this is often a preliminary to applying for winding up.
  • Issue of a Winding Up Petition – available where the tenant is a limited company.
  • Debt action – a claim for recovery of the debt in the courts.
  • Taking money from rent deposits (if any)
  • Claiming against guarantors (if any)
  • Serve notice on sub-tenants (if any) requiring them to pay their rent to you.
  • Possible claim against previous tenants or guarantors (if any) in some circumstances.

What difference do the new measures make?

An important point is that rent remains payable under the lease and, if not paid, the tenant is building a debt for the future.

The first measure, introduced by the Coronavirus Act, was to prevent landlords from terminating a business tenancy by re-entry or forfeiture proceedings for non-payment of rent from 26 March until “the relevant date” which was 30 June 2020 but which has now been extended to 30 September 2020 (but which could be  further extended). Importantly, the right to forfeit remains and can be exercised after that date. In addition, forfeiture remains a possibility for insolvency on the part of a tenant or for breaches of other covenants although the legal process can be daunting.

In the light of the above, many landlords sought to take recovery action using the other tools set out above. In order to counter this, the Government has since published further measures in the Corporate Insolvency and Governance Bill, to protect commercial tenants from what it calls “aggressive rent collection” by landlords:

  • The use of CRAR has been banned unless the arrears of rent are at least 189 days' (originally 90 days')
  • A Winding Up Petition based on an inability to pay debts due will now be reviewed by the court prior to issue, with no petitions to be presented or orders made “where a company cannot pay its bills due to Coronavirus.” Since the burden of proof falls on the landlord, who is unlikely to have access to detailed financial information relating to the tenant, the court would be expected to side with the tenant in most cases and costs would have been wasted.

Many commentators take the view that the Government’s measures operate unfairly against commercial landlords, who have their own financial obligations to meet, and many of whom are seeing a dramatic fall in the income from their property portfolios.

What are the other dangers?

We all know that the current situation is “unprecedented” but there are real dangers in you acting in a moment of panic without carefully considering the medium and long-term consequences of your actions.

Although leases cannot be terminated by re-entry or forfeiture for non-payment of rent, they can be terminated by the exercise of break rights (where these exist in the lease) or following negotiated agreement. Your tenant may be willing to negotiate an early exit, particularly if he realizes that the premises will no longer be required in the “new normal”.

If a lease is terminated, by whatever mechanism, the tenant is no longer under any obligation to pay rent. In the current climate, it may be very difficult to find and negotiate terms with a new tenant and you may be left with a vacant property for some time. You should consider the likely consequences of whatever actions you are looking at.

Conversely there is the risk of a lease being terminated by accident – for example, if you inadvertently accept the keys from a tenant who has vacated the property this can operate as an automatic surrender of the lease, bringing the tenant’s obligations to an end. If the keys are being held for some other purpose, this must be properly recorded in writing.

Don’t forget to ensure that any vacated premises are secure, that the insurance position has been checked and be alert to the danger of squatters.

What steps can you take?

1.            Communicate

Ideally, there should be regular and continuing communication between you and your tenant in the expectation of negotiating an agreement that works for both of you. However, you should first identify whether your tenant is simply experiencing short-term cash problems (but otherwise has a good and viable business); is an ailing business (likely to have been terminally damaged by the impact of the pandemic); or is a strong business simply taking advantage of the situation. You should be prepared to respond differently to each of these and will need guidance tailored to the circumstances of your particular tenant.

2.            Negotiate

If your tenant has a good chance of survival, then it makes sense to try and assist him in keeping the property, perhaps by negotiating a variation to the lease or to the payment terms (which could be as simple as you agreeing to accept rent on a monthly basis). You should take proper legal advice to ensure that any such agreement is properly recorded in writing to avoid ambiguities and to ensure enforceability in the future. Particular care needs to be taken where the lease contains provisions allowing for a break by tenant or landlord and specialist advice will be needed here as mistakes could be very costly.

3.            Debt recovery action

It should be borne in mind that the remedy of a debt claim remains unaffected by the new measures. If a lease has been properly drawn, you are likely to be able to recover not only the outstanding rent but also contractual interest on that figure and your legal costs and court fees. As ever, you should consider whether the tenant has, or is likely to have, the means to pay before throwing good money after bad. Landlord and tenant disputes are a particularly complex area and you should seek advice from a lawyer experienced in property litigation before making your cost-benefit analysis. If you are able to pursue former tenants or guarantors, you need to be aware of the strict time-limits that apply.

4.            Prepare for 01 October

At present, the protection conferred by the new measures is now set to expire on 30 September. It may well be that this period will be extended or that other measures will be introduced.  None the less, you should be prepared to move quickly as this date approaches to avoid being taken by surprise. For example, provided that the proper procedure is followed, you should be able to take steps to forfeit a lease based on arrears for one, or possibly, two rent quarters.

5.            Be careful in what you say and the action that you take

There are a number of other situations in which ill-informed actions on your part could prejudice you in your future dealings with your tenant and you should always be careful before taking action. For example, once the moratorium period has expired, there is a danger of you inadvertently waiving the right to forfeit the lease for non-payment, e.g. by continuing to demand rent and deal with the tenant in the usual manner.

Contact us

The law relating to landlord and tenant issues has always been something of a minefield with many traps for the unwary and this is an area were specialist advice should always be sought. The situation is even more dangerous today and you should take full advice on the range of legal and practical options that may be available to you and how best to navigate your way forwards.

Here at Nowell Meller, we have  particular expertise in dealing with matters of this nature, whether in helping you to achieve an enforceable negotiated agreement or in pursuing effective court action. I am head of our Disputes service and, being a member of the Property Litigation Association, a recognised specialist in this area.

As a first step, please call me for a no-obligation discussion to help you understand your options and to decide on your next steps.

Steve Kirwan

Direct Dial: 01782 831833