During 2020, the COVID-19 pandemic has forced the government to take unprecedented steps to protect tenants and preserve businesses in England and Wales. We have seen long-held landlord’s rights put on ice, in the hope that preventing or delaying enforcement against tenants that have not paid their rent will effectively kick the can down the road.
Have these protections gone far enough? Have they gone too far? How is the market reacting as the relationship between commercial landlords and tenants is redefined?
Figures published by Remit Consulting in its latest research reveal that seven days after rents were due, overall, 62% of rents due on commercial properties had been collected, almost 12% higher than in June and just over 5% higher than the figure witnessed at the same point in the March quarter.
Rents paid by leisure occupiers are performing worst, with just 38.1% of rents recorded a week after the quarter day. Of all sectors, offices have performed the best, with landlords collecting 77.4% of rents a week after September’s quarter day. This still represents a lot of rent in arrears, however.
Importantly, none of the government’s measures include a release for tenants from paying commercial rent. On 19 June 2020, the government published the Code of Practice for commercial property relationships during the COVID-19 pandemic. This states:
"The legal position is that tenants are liable for covenants and payment obligations under the lease, unless this is renegotiated by agreement with landlords. Tenants who are in a position to pay in full should do so. Tenants who are unable to pay in full should seek agreement with their landlord to pay what they can taking into account the principles of this code."
"How is the market reacting as the relationship between commercial landlords and tenants is redefined?"
Tenant protections
With national lockdown enforced on 23 March, just a couple of days before the March quarter day, the government had to act quickly. It brought in several measures to protect commercial tenants, including the following.
Forfeiture
Under section 82 of the Coronavirus Act 2020, a landlord is prevented from starting court proceedings or effecting peaceable re-entry to forfeit a lease for non-payment of rent between 26 March 2020 and the end of March 2021; this latest extension of the deadline being announced by the government on 9 December 2020. While this only concerns leases to which Part 2 of the Landlord and Tenant Act 1954 applies that still means it covers the vast majority. However, Part 2 does not apply to mining leases, tenancies of less than 6 months – unless there is provision to extend the term or the tenant has been in occupation for longer – farm business tenancies, or tenancies covered by the Agricultural Holdings Act 1986.
Commercial rent arrears recovery (CRAR)
Under the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 restrictions have been put in place on landlords using CRAR so that if using CRAR before 24 December the rent needs to be at least 276 days rent to be in arrears (rather than the usual 7 days) and after 25 December it will be 366 days. On 9 December 2020 it was announced that these restrictions will continue until the end of March 2021.
Statutory demands and winding-up petitions
The Corporate Insolvency and Governance Act 2020 prevents a winding-up petition being presented between 27 April and 31 March 2021 – again, this latest extension being announced on 9 December 2020 – unless the landlord can show it has reasonable grounds for believing that coronavirus has not had a financial effect on the tenant company, or the company would have been unable to pay even if coronavirus had not had a financial effect on it. This is likely to be very difficult to prove, so in practice we expect to see all petitions stop while these provisions apply. This restriction only applies to companies however and not to individuals.
Options for landlords
Despite these restrictions, commercial landlords need not sit idly by while their tenants are not paying rent and can consider the following options.
They may draw down on a rent deposit provided that they follow its terms, which could require notice to be given, or they may seek recovery of unpaid rent from a guarantor under the lease.
The restrictions on serving statutory demands under the Corporate Insolvency and Governance Act 2020 only apply to companies and not to individuals. Therefore, if you have a tenant or a guarantor of that tenant who is an individual, rather than a company, you can still serve a statutory demand on them potentially as a precursor to bankruptcy.
A landlord may be able to claim the arrears from former tenants (i.e. one who has assigned the lease) or their guarantors. To do so, they will need to follow the strict time limits and regulations set out in the Landlord and Tenant (Covenants) Act 1995 carefully. For "old leases" – those pre-dating 1 January 1996 – a landlord may be able to recover arrears from the original tenant, or from a subsequent one that has given a direct covenant to be liable for the rest of the term of the lease. For a lease granted after that date – a "new lease" – it may be that former tenants have guaranteed the current tenant’s lease obligations with an authorised guarantee agreement (AGA), or a guarantor has underwritten the performance of one through a guarantee of an AGA , and there may be a claim under that, subject to compliance with the strict rules and time limits set out in the 1995 Act. A landlord can also issue court proceedings for arrears. The landlord may seek to apply for a summary judgment in a suitable case where it is considered there is no defence to the claim. Having obtained a judgment, the usual methods of enforcing a judgment can then be pursued including for example bailiff enforcement as long as the obvious social distancing and tier-specific rules are followed.
The mood has changed since the September quarter day. It is certainly true that the government’s code of practice is voluntary and lacks teeth. In our view, however, tenants would be well advised to pay heed to it; landlords are increasingly frustrated by those that do not engage in meaningful dialogue and start to clear some of their mounting arrears.
Part of the reason for the slight uptick in the September rent collections will have been the relatively free summer that some parts of the country enjoyed. The government surely hopes that the switch from November’s national lockdown to a new tiered system earlier this month will have the same effect on rent payments for the December quarter. We will see.
"Commercial landlords need not sit idly by while their tenants are not paying rent"
Concessions and tensions
In the meantime, we are observing an increasing number of rent arrears claims and judgments being obtained. Concessions continue to be negotiated on many leases, more commonly with rent deferments and less so with write-offs of part arrears but in growing numbers, as well as re-gears. The terms of re-gears are varied but have commonly included agreement to pay monthly rents. In return for rent concessions, some tenants have also been willing to agree reversionary leases to extend their commitment, or to forgo break options.
But at the same time, we are seeing an increasing number of company voluntary arrangements, where tenants seek to impose a new rent payment regime on landlords rather than freely negotiating changes as they might have done in the past. The long-term effectiveness of these will be the subject of many commentaries after the pandemic; but at the moment many furious landlords are complaining about the lack of tenant engagement before they enter into such arrangements.
Over the years, we have seen many initiatives to try to increase collaboration between landlords and tenants, most notably perhaps RICS’ own Code for leasing business premises. The pandemic has changed the landlord and tenant relationship, and the take-up of such initiatives may be greater in future, perhaps encouraged by the government. Rebert Jenrick, Communities Secretary, has recently suggested a review of "outdated" legislation to "consider how to enable better collaboration between commercial landlords and tenants".
There is little point in a landlord simply resting on its contractual rights while arrears mount and tenant solvency declines. There is increasingly little sympathy with tenants who fail to engage and to pay what they can.
If there is some good to come from the pandemic, it may be a renewed understanding that landlords and tenants are 2 sides of the same coin – and that without both there is no coin at all.
Related competencies include: Landlord and tenant, Leasing and letting, Legal/regulatory compliance