As the Scottish Government considers extending the Coronavirus (Scotland) Act anti-irritancy provisions, which effectively prevent landlords from terminating commercial leases, speculation is increasing that temporary restrictions in England on landlords taking action against tenants in rent arrears may also be extended.
What are those provisions and what do they mean for retailers?
The Coronavirus Act 2020 has placed a number of temporary restrictions on landlords, including:
- A moratorium period within which commercial landlords cannot enforce their right of forfeiture of leases for unpaid rents.
- A restriction on using CRAR (the statutory procedure of commercial rent arrears recovery) to recover unpaid rents.
Separately, the Corporate Insolvency and Governance Act 2020 brought a temporary halt to winding up based on statutory demands for the period 1 March 2020 until 30 September 2020.
It also added an extra condition to be satisfied before a winding up order can be obtained against a company on the grounds that it cannot pay its debts. The creditor (for example, a retail landlord) must prove that Covid-19 has not had “a financial effect” on the company (such as a retail tenant) or that the relevant ground for the petition would have arisen even if Covid-19 had not had a financial effect on the company.
This applies to any winding up petition presented after 27 April 2020 and relying on a statutory demand issued between 1 March and 30 September. Even where debts pre-date Covid-19 it is possible for a debtor to argue that Covid-19 had an impact on their ability to pay and thus a creditor relying on the debts being due before Covid-19 as a reason to commence proceedings will need to provide evidence that Covid-19 had no effect on the company’s inability to make payments.
Because of these dual restrictions, many retail landlords have elected not to act to recover rental arrears from tenants. However, on 1 October 2020 these restrictions will be lifted, and tenants can anticipate that landlords will take decisive steps to cover any arrears in respect of which an agreement has not been reached.
With less than three weeks to go, retailers should be both ensuring that they have a business plan in place for once the restrictions are lifted and keeping an eye on whether the temporary legislation (or some part of it) is to be extended.
If the temporary legislation is extended, then landlords may instead consider what actions they can take now. Whilst these are heavily restricted, they are considered below.
What options remain for landlords to ensure they are paid?
Landlords can look at existing security. There appears to be no restriction on them pursuing guarantors or former tenants under leases. If premises are sublet, landlords could require subtenants to pay rent direct. In addition, landlords can call on rent deposits, but should consider which sums they are best used to cover to ensure the greatest effect in the event of subsequent insolvency proceedings.
A debt claim could be brought, but this incurs significant legal cost and current court delays mean that it will not be dealt with quickly. It may be appealing where a tenant has assets over which a charging order could be made. Alternatively, if the landlord’s main aim is to just regain possession of the property, forfeiture on grounds other than non-payment of rent is still an option.
A more realistic and reputationally favourable option for both parties may be to take note of the recently published Code of Practice for commercial property relationships during the Covid-19 pandemic. This promotes parties acting in good faith to sustain landlord and tenant relationships impacted by lockdown restrictions. It is voluntary, but there is potential for reputational damage if it is ignored. Landlords will also need to have regard to the covenants in any loan documentation which may require lender consent.
Carol Phillips, partner in Foot Anstey’s Commercial Property Team