Rent in a lease of business premises typically falls due on the usual quarter days: 25 March, 24 June, 29 September and 25 December. In Q1 of this year, on average only 48.2% of rent was collected by landlords and Q2 is likely to be far less as the ‘Corporate Insolvency and Governance Bill’ (“Bill”) makes its way through Parliament and into law.
Remedies available to a landlord to recover tenant arrears
There are a number of procedures a landlord can employ to recover sums due from non-paying tenants: forfeiture of the lease, serving notice under ‘Commercial Rent Arrears Recovery’ (“CRAR”), issuing a money claim or, serving a statutory demand for payment. Some are viewed as more aggressive tactics than others. For example, forfeiting a tenant’s lease might be a good way to get premises back and re-let to a proper paying tenant, but it can be a tricky process for an unwitting landlord who effects a peaceable re-entry or issues forfeiture proceedings; and, if there’s no prospective tenant waiting in the wings to take up the premises, forfeiture often does not suit a landlord. CRAR has limited effect where the tenant is not goods-rich (and even if it is, the effect is often limited without the ‘element of surprise’). A money claim does not result in swift recovery of arrears.
Landlords therefore, often look to service of a statutory demand for payment as a relatively quick and cheap option in dealing with non-paying tenants. A statutory demand is the first step on the insolvency process and sits outside of any formal court action. It may be served upon an individual where the sum exceeds £5,000 or, against a company where it exceeds £750.
Changes to the remedies available during lockdown
Forfeiture: 3-month moratorium from 26 March 2020 to 30 June 2020 (section 82 Coronavirus Act 2020).
CRAR: A landlord will not be entitled to issue a CRAR notice, until rent is outstanding for 90 days (The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020).
On 23 April 2020 (as updated), Government announced that guidance would be given to ban the use of statutory demands for the period 1 March 2020 to 30 June 2020 and presentation of winding up petitions for the period 27 April 2020 to 30 June 2020 (“Prohibition Period”). The draft legislation in the Bill is not yet public, but the Government statement so far given raises a number of questions for both landlords and tenants during the Prohibition Period.
The legislation is likely to capture only ‘statutory demands and winding up petitions’. Winding up petitions are for business entities, whereas bankruptcy petitions are presented against individuals.
It therefore follows that individuals might not be caught by the ban. As a landlord, if the named tenant is for example, ‘person x trading as x’, it appears there would be no prohibition on serving a statutory demand on that tenant. Even if the ban applies to statutory demands generally, a landlord might, where certain conditions are met, be able to leapfrog that stage and proceed straight to issuing a bankruptcy petition.
Government states the ban will relate to ‘rent’. Other sums fall due in a lease such as service charge, utilities, etc. Commercial tenants might readily breach the £750 cap in other quarterly sums due in their lease. Whether those sums would in fact satisfy the test of being “then due” (section 123(1)(a) Insolvency Act 1986) will first need to be established. However, again, a landlord might decide to leapfrog the statutory demand stage and instead present a winding-up petition based on an unliquidated sum (rule 14.1(5) The Insolvency Rules 2016).
Government states the prohibition will apply “where the company’s inability to pay is the result of COVID-19”.
- Where the burden of proof lies on showing that non-payment is as a result of COVID-19 remains to be seen.
- Whether the existing test of a company being unable to pay its debts will need to be modified to factor in a temporary COVID-19 defence. (Unable to obtain a short-term loan? No cash at the bank? Profitable up to lockdown, but unlikely to be in the future?)
- For profitable businesses up to lockdown, whether the Prohibition Period in and of itself is an absolute defence to the presentation of a bankruptcy or winding up petition.
Question marks also sit over the ability of legislation to apply a blanket ban on service of a statutory demands, which are not subject to any formal court or tribunal process. A court can simply refuse to issue or, order that a winding up petition not be issued. But a statutory demand is a simple document served upon the debtor by the creditor.
Practically speaking, effecting service of a statutory demand (which requires personal service) during lockdown is likely to result in a breach of the social distancing measures/no non-essential travel. Relying upon substituted service by registered post is an option, but landlords might not be so inclined to do so in circumstances where the demand or petition could fall foul of the future legislation in any event.
We may find that individuals are disproportionately affected by legislation that fails to include them, granting a licence to large corporate entities to not pay rent but not affording the same grace to your local sole trader hairdresser or newsagent.
How we can help
From a tenant’s perspective, not paying rent will do nothing to help it get back up and running post-lockdown. Build-up of rent and other liabilities is likely to result in the use of more aggressive action by landlords following expiry of the Prohibition Period.
Landlords will want to ensure that they are proactively engaging with tenants to ensure prompt payment of rent and be aware of the options available to them where tenants fail to pay. Tenants need to be live to available options in the new legislation and act swiftly where their landlord takes enforcement action.
Lucie Barnes is a property litigation specialist at Baines Wilson LLP.
If you are a landlord of business premises concerned about non-paying tenants or, you are a tenant threatened with enforcement action, and you would like to discuss your options, we would be happy to hear from you. Please contact us on 01228 552600 or, email@example.com