Dealing with commercial rent arrears and forfeiture: options for landlords post pandemic
Many commercial landlords are now dealing with rent arrears accrued during the pandemic. Kayleigh Whitman, Chartered Legal Executive in Coodes Solicitors’ Commercial Disputes team outlines the options for landlords seeking repayment of rent or forfeiture.
Emergency legislation in the Coronavirus Act 2020 led to a moratorium on commercial landlords evicting tenants that were unable to pay their rent. Restrictions were put in place to prevent landlords seizing goods unnecessarily from tenants in lieu of rent and landlords were also prevented from making tenant companies with rent arrears insolvent.
During the moratorium many business tenants have accrued commercial rent arrears. While most Covid-19 restrictions have now been lifted the moratorium on forfeiture for rent arrears remains in place until 25 March 2022.
Businesses continue to feel the effects of the pandemic as the economy recovers. So, what are the options for landlords and tenants going forward?
Dealing with rent arrears accrued during the pandemic
Landlords and tenants can now use the new Commercial Rents Code of Practice which replaces the previous Code which was published last June. The Code continues to focus on encouraging landlords and tenants to work collaboratively where possible, but has been revised to align with the Commercial Rent (Coronavirus) Bill.
The Bill aims to support the orderly resolution of rent payments accrued by commercial tenants during the pandemic. Rent arrears accrued from March 2020 will be ring fenced for tenants who can show that they have been impacted by business closures until restrictions were removed for their sector. It will also introduce binding dispute resolution in the form of arbitration when landlords and tenants remain in dispute.
Prior to the Bill coming into force parties to a Lease can use the Code to guide them in negotiations on rent arrears. The Code states that, where affordable, tenants should aim to meet their obligations under the Lease in full.
Updates to Commercial Rent Arrears Recovery (CRAR)
Landlords should also ensure they are familiar with the latest changes to Commercial Rent Arrears Recovery (CRAR). Partner and Head of Commercial Litigation Abi Lutey previously wrote about changes to CRAR.
Previously known as ‘distress’, CRAR is the process whereby landlords can appoint enforcement agents to enter a tenant’s property to take control of goods and sell them to pay off rent arrears.
The most recent changes mean that until 25 March 2022, for actions started after 24 June 2021, CRAR may only be used if there are at least 554 days’ arrears. If the tenant can bring the arrears down below the threshold the landlord is unable to use CRAR as a recovery action.
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Recent cases provide welcome news to landlords
As we wait for new legislation to be passed, landlords may be unsure of their options. Each case will need to be considered on its facts and the wording of the lease.
Two notable recent cases have dealt with money claims for commercial rent arrears:
Commerz Real Investmentgesellschaft mbh v TFS Stores Ltd
The case of Commerz Real Investmentgesellschaft mbh v TFS Stores Ltd was the first judgment handed down during the pandemic relating to a money claim for rent and service charge arrears.
The tenant had a ten-year lease of a unit in a retail centre. As a result of the pandemic, as a non-essential retailer, it had been required to cease trading for periods from March 2020. At other times, although it could trade, footfall was significantly reduced because of the pandemic. The tenant claimed the financial hardship they suffered prevented them from paying the rent and service charge due under the lease.
Each of the tenant’s defences were rejected by the court, which awarded summary judgment for the landlord for the arrears of rent and service charge.
London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others
In the recent case of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others, summary judgment was also largely granted in the landlord’s favour.
Coronavirus restrictions had required the cinema to close for certain periods, so the tenant could not trade at all. Between lockdowns, trading conditions were so difficult that the cinema largely remained closed. When it did open, its takings were comparatively small.
The landlord sued for rental arrears, which had reached £2.9million. The High Court ruled largely in the landlord’s favour. It is not yet clear whether the decision will be subject to appeal.
While businesses have suffered significantly because of the pandemic, it is clear from these two recent cases that the court can do little to depart from the contractual terms set out in commercial leases.
It is likely that we will see a range of arguments raised in defence to claims for rent arrears and service charges, both before and after the introduction of the new legislation.
It is encouraging that, although the regulations have limited a landlord’s ability to exercise their right to remedies, it has not altered the landlord’s right to bring a claim against a tenant for rent arrears.