PROPERTY JOURNAL

Unpaid rent: how do judgments affect landlords?

Where do recent cases over non-payment of rent and tenant CVAs during the pandemic leave commercial landlords – and what recourse is open to them?

Author: Jeremy Ferris

26 August 2021

Commercial landlords have had a rough ride since COVID-19 hit the UK. The Coronavirus Act 2020 severely restricted their ability both to forfeit leases for non-payment of rent and seize goods in payment of arrears under the commercial rent arrears recovery procedure.

To compound those woes, on 16 June this year the government announced a further extension of the existing moratorium on landlord action for rent arrears, from its original expiry date of 30 June to 25 March next year. The extended moratorium was yet another significant blow to already beleaguered commercial landlords.

Less frequently mentioned, however, has been the fact that landlords have retained the ability to sue for unpaid arrears. Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd [2021] EWHC 863 (Ch) was just such a case.

In Commerz, the landlord was successful in obtaining a summary judgment against the tenant for rent arrears on the basis that the latter had no real prospect of defending the claim at trial. That was despite the tenant's protestations that the landlord was exploiting a loophole in the legislation and that it had been forced to close stores as a result of the pandemic.

The tenant further argued that the landlord had failed to engage with the government's Code of practice for commercial property relationships during the COVID-19 pandemic, which requires landlords and tenants to work together to reach sustainable arrangements. The court however held that the purpose of the code was not to alter the legal relationship between the landlord and tenant and was not 'a charter for tenants declining to pay their rent'.

Tenants entering CVAs

That apparent glint of sunshine has nevertheless to be balanced against a further swathe of cases on which judgments were given earlier this summer. These all dealt with defaulting tenants that wished to enter into company voluntary arrangements (CVAs).

In simple terms, a CVA allows a company to terminate its financial liabilities under a lease, provided that 75% of the creditors by value agree to its proposals in respect of those liabilities.

One might think that landlords with large arrears liabilities might be well placed to influence or decide the outcome of such a vote: it is the value of debt owed to the creditor that determines their voting power, and landlords would, due to those arrears, command a large share of this amount.

However, while ascertained arrears are given actual value, unascertained or unliquidated sums such as future rent or dilapidations carry a value of £1 for voting purposes, unless the chair of the CVA creditors' meeting agrees a higher value. As a result, many landlords have limited voting rights compared to those of other creditors.

The cases that have most recently dealt with this issue essentially involve tenants using CVAs to discard badly performing shops, and therefore to improve profits by reducing rents in their overall portfolio. The gist of the landlords' arguments in these cases has invariably been that the CVA process is unfairly prejudicial to them.

Typically, in a CVA the defaulting tenant's leases are put into three categories:

  • group A: profitable stores, where leases can be left in place at current rents
  • group B: marginal stores, namely underperforming sites that could be made viable by, for example, reducing rents
  • group C: unprofitable stores, which are to be closed and returned to the landlords.

In May this year, judgments were given in three cases where tenants had sought the protection of CVAs. Those cases were: Lazari Properties 2 Limited and others v New Look Retailers Limited, Butters and another [2021] EWHC 1209; Virgin Active Holdings Ltd & Ors, Re [2021] EWHC 1246; and Carraway Guildford (Nominee A) Ltd and others v Regis UK Ltd and others [2021] EWHC 1294. In each case the CVAs were being challenged by the landlords in question.

The cases ultimately approved the companies' arrangements, which represents a major setback to landlords that have tried to supress tenants' use of CVAs as a restructuring tool. The upshot of the decisions is that many landlords will now receive no more than perhaps a substantially reduced turnover-based rent until the expiry of their leases and, worse, that some will receive nothing at all.

This is clearly bad news for landlords that had argued they were unfairly prejudiced as a class of creditor. Their cases were essentially that, because future rent and dilapidations are effectively ignored when considering the share of the vote, they had relatively little voting power in CVAs. Their interests are therefore liable to be overlooked in preference to those of other parties.

Although there was a small victory in Carraway Guildford in that the judge found a CVA favouring the tenant's parent company was unfair, it is clear that – for the moment at least – the courts' view of CVAs is that they are neither unfair nor prejudicial to the landlords.

These were landmark judgments in the commercial property world and it seems that, for the time being, the rescue culture clearly trumps the interests of individual landlords.

Where tenants default, though, landlords are not without recourse. As mentioned above, the option to sue for arrears remains and will often provide the simplest and most cost-effective way to do so, particularly where summary judgment can be obtained. Landlords are also generally unrestricted in their ability to take from rent deposits or pursue third-party guarantors.

Perhaps above all else, landlords and their agents must review the arrears regularly so that quick and effective action can be taken whenever necessary.

Jeremy Ferris is a partner at Furley Page
Contact Jeremy: Email

Related competencies include: Landlord and tenant, Leasing and letting

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