On the 25th March, we published an article outlining the restrictions on a landlord exercising forfeiture. Today we revisit this, and outline what landlords can do if a tenant is in default.
The Coronavirus Act 2020 came into power on 25th March 2020 and included a number of vast changes affecting different sectors of society and businesses. One of those changes, stifled the remedy of forfeiture for landlords of business tenancies where tenants fail to pay rent. Since 25th March, the time periods have been extended twice and other restrictions have been introduced affecting different remedies normally available to landlords.
So if you are a landlord, what can you do if your tenant defaults on paying the rent? We have set out a number of options below:
- Payment plan – you may want to agree a new payment plan with the tenant for the arrears to be paid at a later date. However, a tenant that cannot afford rent now may not be able to meet any future payment plan.
- Rent variation – a number of landlords have gone down the route of agreeing a side letter to temporarily suspend the rent – a payment holiday in effect. This doesn’t help with recovery in the short term and also impacts the landlord’s cash flow and ability to pay their lenders but it does give the tenant a breather with the intention that the landlord will be able to recover all of the arrears and future rents from the tenant
- Rent deposit – you may have agreed a rent deposit with the tenant when the lease was completed. This is security for breaches of the tenant’s covenants in the lease – often non-payment of rent. This is often governed by a rent deposit deed. The landlord’s rights are set out in the deed and you may be able to recover unpaid sums with little notice. The tenant is ordinarily obliged to top up any withdrawals. Please note certain types of deposit may be protected from drawdown if the tenant is subject to the new “statutory moratorium” under Corporate Insolvency and Governance Act 2020 (‘CIGA 2020’).
- Guarantor – if the lease was guaranteed by an individual or a company, you could look to the guarantor to cover the rent or even to take a new lease. Look at the terms of the lease and any separate guarantee to see if there are any caps on liability.
- Commercial Rent Arrears Recovery (‘CRAR’) – Note new regulations have been introduced (Taking Control of Goods and Certificate of Enforcement Agents (Amendments) (Coronavirus) Regulations 2020) meaning this remedy can only be used if the extent of the tenant’s arrears equate to at least 276 days’ rent up to and including 24th December 2020. This will increase to 366 days’ rent from 25th December 2020.
- Undertenant –if your tenant has sublet the property but then defaults, you could seek rent payments from the subtenant directly. This right is exercised by serving a section 81 notice on the subtenant. However, somewhat frustratingly, the service of a section 81 notice is currently subject to the same restrictions as outlined above for CRAR. The rent outstanding from the tenant would need to be at least 276 days’ rent up to and including 24th December 2020 or 366 days’ from 25th December 2020.
- Forfeiture – a landlord cannot currently forfeit a lease until after 31st December 2020 for non-payment of rent or other sums under a lease. Note this restriction applies regardless of whether non-payment results from the coronavirus. However, a landlord may still be able to forfeit a lease for a tenant breach of covenant albeit they will have to go through the usual notification procedure.
- Sue for rent – an obvious remedy which can be expensive and time consuming. There are court delays currently and so this is not a ‘quick fix’. It may also be a dead-end if the tenant has no money. Have a look at their covenant strength before you go down this route. If the tenant is subject to a statutory moratorium under the CIGA 2020 then court proceedings may be restricted.
- Insolvency/bankruptcy – threatening bankruptcy/winding up is inexpensive and may scare the tenant into paying the arrears. Please note that the CIGA 2020 has imposed temporary restrictions against serving statutory demands and issuing/presenting winding up petitions for companies only (this does not affect individuals). There are further restrictions where a tenant is subject to a CIGA 2020 statutory moratorium.
Ultimately, as we advised in our previous article on commercial tenant defaults, it’s good to talk! However, a number of the usual remedies available to a landlord have been removed (albeit temporarily). You should keep in contact with your tenant and try to arrange voluntary alternative arrangements for any rent arrears. This could save significant costs.