Commercial rent recovery and upcoming changes - to June and beyond!

With commercial rent collection showing signs of returning to pre-pandemic levels, there are still many tenants (particularly within the hardest-hit sectors, such as live events) that could struggle to cover the costs. When negotiation is no longer possible, what are the next steps? Associate in the Property Litigation team, Priya Sejpal considers the evolving legal landscape with regards to the commercial property sector during the pandemic, specifically, rent recovery options in June, upcoming changes post-June, and the options available for both landlords and tenants.

Casting our minds back to almost a year ago, on 19 June 2020, the government published a code of practice for landlords and tenants of commercial property across the UK. Whilst the code is voluntary, it has been endorsed by a number of organisations including the RICS. The crux of the code is "transparency and collaboration" and for both landlords and tenants to act "reasonably and responsibly" with one another.

The code was brought out amidst the government placing a moratorium on the forfeiture of most commercial or business leases (section 82 Coronavirus Act 2020 prevents any forfeiture between 26 March 2020 and 30 June 2021, whether by proceedings or peaceable re-entry for non-payment of any sums due under the lease).

As of right now, therefore, there is no movement that can take place to forfeit a commercial lease. Should negotiations not be fruitful then the options that a landlord may want to consider are as follows:

  1. reasonable grounds for believing that coronavirus has not had a financial effect on the company or
  2. that the debt issues would have arisen anyway, irrespective of the impact of the pandemic.

Once the moratorium lifts, landlords should be aware that in the event a company is wound up, a landlord will usually be an unsecured creditor in the ensuing liquidation and the liquidator will have the right to disclaim the lease.

  • Recovery from former tenants and/or their guarantors - by way of a summary, if the lease is an 'old lease' i.e. one which was granted prior to 1 January 1996 then a landlord can recover from the original tenant or any former tenant who has given a direct covenant to be liable for the remainder of the term or their respective guarantors. If the lease is a 'new lease' e. one which was granted on or after 1 January 1996, then a landlord can recover arrears from the former tenant if that former tenant had given an Authorised Guarantee Agreement (AGA), or from a guarantor who has guaranteed the performance of one under a 'GAGA'. Whether you are working off an old or new lease, the Landlord and Tenant (Covenants) Act 1995 requires that you serve a section 17 notice; this will need to be in a prescribed form and served within a strict timeframe (six months) of the charge arising.
  • Recovery from an existing (not former) guarantor - a landlord may be able to recover rent arrears from a guarantor but it will be prudent to check the wording of the relevant clause as there may be restrictions as to when you can call on the guarantor or only after the tenant has been pursued first.
  • Recovery from subtenants - if the tenant has sublet the premises and is in arrears, the CRAR procedure gives a superior landlord a right to serve a notice under section 81 of the Tribunal, Courts and Enforcement Act 2007 upon its subtenant requiring the subtenant to pay its rent directly to the superior landlord rather than to its own landlord to the extent of the arrears due from the immediate tenant.
  • Rent Deposits - whilst landlords do have the option of drawing down on a deposit, this will very much depend on the terms of the deed governing the deposit and how the deposit is held. Subject to the wording, landlords should consider drawing down on any deposit if the tenant is likely to become insolvent.
  • Court proceedings to pursue the debt- there are no restrictions on issuing claims in either the High Court or County Court to recover arrears of rent from tenants. However, landlords will need to check the wording of the lease to ensure that the tenant is not entitled to exercise a right of set-off, deduction, or counterclaim in respect of rent payments. On the basis that this is prohibited, then the tenant is unlikely to be able to defend a claim and a landlord should be able to get judgment fairly quickly and cheaply, particularly if summary judgment is sought.
  • Forfeiture - whilst landlords cannot exercise a right to forfeit a lease on the basis of a tenant’s non-payment of rent at this present moment in time, landlords do have the right (during this suspension period) to excise the right to forfeit based on other breaches of the lease. The topic of forfeiture is huge, not to mention a hot topic at present and so landlords should be very careful to get specialist legal advice on this, particularly on matters such as waiver. When the moratorium does lift, landlords will be relieved to know that they will be able to not only claim rental arrears (if that’s the breach on which you are forfeiting) but also most standard leases will allow for landlords to claim interest, and any landlords costs that have arisen as a result of claiming or recovering any arrears of rent.

The future

The question to consider is do we think that there will be a surge of commercial landlords who after 30 June will be running to the courts to forfeit leases?

This is something that time will tell but what can be said is that the retail market is now slowly swinging back to action; the owner of the Westfield shopping centres said its London sites had over one million visits in the week starting 12 April, and that footfall was at 75% of the 2019 level. Meanwhile, WH Smith plans to expand with some 100 new travel stores.

Normal rents are to resume from the June quarter date and whilst many businesses are now in a better position to meet this obligation, what will the position be for the arrears that have accrued?

Various proposals have been put forward, one of which is for payments owed from before to be ring-fenced and for parties to agree on plans, such as full repayments, deferrals, or discounts for example; the idea behind this is to keep historical payments separately which should help protect jobs, keep businesses trading and support the economic recovery.

Some landlords may be minded to write-off COVID-related debts.

There have also been talks on turn-over rents. Turnover rent is a form of rent that is dependent on a tenant’s trading turnover. This form of rent can therefore only be used where turnover is generated at the premises, for example, in retail.

The use of turnover rent ultimately means that both parties to the lease have an interest in ensuring the success of the business. The basic concept is where a tenant’s business produces a higher turnover, the landlord will receive a higher rent. Where a tenant’s business is struggling, the tenant is not required to pay an unsustainable rent to the landlord. The idea is to create a more collaborative relationship between the parties.

Due to the lack of certainty of income for both landlords (rent) and tenants (turnover) during the coronavirus pandemic, we are starting to see more turnover rent provisions in commercial property leases. Tenants are looking to keep their businesses going and landlords are looking to keep their properties tenanted; so a “win-win” perhaps.

The government is considering all options, in particular, formal mediation and/or adjudication between landlords and tenants.

Ultimately, we await with interest the outcome of the government’s recent “call for evidence” on the withdrawal or replacement of the protections it has put in place to protect commercial tenants during the pandemic which expire on 30 June 2021, which could significantly change the situation for rent arrears again.

If you have any questions about this topic or require support for your business, please contact a member of our Property Litigation team.

 

Who to contact

Priya
Sejpal

Associate , London

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