The Coronavirus Act 2020 contains a number of measures to shield occupiers from the economic impact of the pandemic. Restrictions curtailed landlords’ options for enforcement action against tenants but the government is now formulating a roadmap to ‘business as usual’ with some restrictions already lifted.
In its Code of Practice, the government strongly encourages landlords and tenants to agree terms deferring or waiving an appropriate proportion of rent arrears. However, the courts have unsurprisingly refused to allow tenants to use the Code of Practice as a defence in rent recovery proceedings.
Given the mixed success and limited reach of the Code of Practice, a Policy Statement published by the UK Government on 4 August 2021 announced that legislation will be introduced to ‘ring-fence’ certain rent arrears. Its scope is expected to be limited to rent arrears which accrued from March 2020 for commercial tenants who were affected by coronavirus business closures until the time restrictions for their sector were removed. A binding arbitration system will also be introduced along the lines of that implemented in Australia in order to deal with ‘ring-fenced’ arrears. Given the scale of the rent shortfall (in the billions), the government is framing the arbitration system as a ‘last resort’ for landlord and tenants who are still expected to try to reach an amicable agreement.
In London Trocadero (2015) LLP v Picturehouse Cinemas Limited , the landlord applied for summary judgment to recover rent arrears (in the region of £2.9 million) which arose in relation to periods when the premises could not be used as a cinema. The court had previously refused to adjourn the hearing on the basis of the government’s announcement that a binding arbitration scheme was to be implemented. The court gave judgment for the landlord (save for a relatively small amount which may be ‘set off’ against the rent and service charges at trial). The tenant’s first defence was that there were implied terms in the leases providing that the obligation to pay rent and service charges would be suspended during periods when the permitted use under the leases became illegal; or that the rent and service charges were only payable when the premises could be used for their intended purpose, as a cinema with the usual attendance levels. The second defence was based on ‘failure of basis’: i.e. the tenant had bargained for the use of the premises as a cinema, and that the leases were premised on this basis. When the premises could not be used in this way, there was a ‘failure of basis’. Both defences failed.
A central message from the government is that if tenants can pay rent, they must pay. The message from the courts is similarly tough, if not tougher still.
Forfeiture of commercial premises and CRAR
The Coronavirus Act 2020 contains express safeguards for business tenants restricting a landlord’s ability to forfeit a lease for non-payment of rent. An initial moratorium suspended a landlord’s power of re-entry or forfeiture on the basis of non-payment of rent and other sums due under the lease, whether failure to pay rent related to COVID-19 or not. This measure has been extended five times, most recently to 25 March 2022. However, a Policy Statement published by the UK Government on 4 August 2021 characterised 25 March 2022 as a ‘backstop’ which may be shortened if legislation is brought in earlier.
The extended protection from forfeiture automatically prolongs the restrictions against landlords enforcing Commercial Rent Arrears Recovery (CRAR). This is a method of debt recovery which allows a landlord to instruct enforcement agents to seize and sell goods owned by a tenant to satisfy rent arrears. The minimum total net unpaid rent that must be outstanding before CRAR can take place was increased: from 7 days’ net unpaid rent (prior to the pandemic) to 544 days’ rent. The August Policy Statement similarly introduces a 25 March 2022 backstop, after which restrictions on landlords’ use of CRAR will be dropped.
Statutory demands are sometimes used to exert pressure on tenants to pay outstanding liabilities. The failure to satisfy a demand used to enable a landlord to present a winding-up petition to put the company into liquidation. The threat of liquidation is often sufficient to persuade the tenant to pay.
The ability to present a winding-up petition for failure to satisfy a statutory demand was suspended between 1 March 2020 and 30 September 2021. From 1 October 2021, this restriction was replaced by a requirement to meet four conditions for the purposes of relying on a statutory demand.
Importantly for landlords, one of the conditions is that it will not be possible to present a winding-up petition if the debt owned is rent or any other payments (such as service charges) that are due under a business tenancy. This will be the case until 31 March 2022. Landlords will not therefore be able to use a statutory demand for the purpose of recovering rent arrears until after that date.
Residential possession proceedings
From 1 October 2021, the notice periods for Assured and Assured Shorthold Tenancies returned to the ‘pre-pandemic’ position. For section 21 notices, landlords can again give at least 2 months’ notice. The notice periods in section 8 notices vary depending on the ground for possession being relied upon.
Having suspended almost all possession proceedings in March 2020, the courts began considering cases again on 21 September 2020. The courts are prioritising the most serious cases such as where there are allegations of fraud, or alleged arrears equal to at least 12 months’ rent.
The government lifted measures protecting residential tenants from eviction on 31 May 2021. Accordingly, bailiffs may now serve eviction notices on residential tenants.