Coronavirus (COVID-19): Government issues further protective measures for Commercial Tenants

The Coronavirus Act 2020 came into force on 25 March, preventing the enforcement of forfeiture of commercial leases for non-payment of rent until 30 June 2020. This meant that commercial tenants could not be evicted from their premises for non-payment of rent, however, this law did not prevent landlords from taking steps to force tenants to pay unpaid rent.

To combat this, the government has announced further measures to protect tenants by temporarily banning landlords from using statutory demands and winding up orders to claim unpaid rent, if the debtor company is only unable to pay its debts because of the Coronavirus crisis. Legislation will also be enacted to prevent landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed at least 90 days of unpaid rent.

Dispute resolution associate solicitor, Amelia Williams, and trainee solicitor Zaeem Mughal look at how this support is intended to assist commercial tenants and identify some key considerations for landlords and tenants.

Who will it affect?

The government’s announcement referred to protecting the “UK high street” and the accompanying commentary refers to both retail and hospitality businesses.  However, it is currently unclear as to how widely the proposals will be adopted, and whether all commercial tenants will benefit from their provisions.

The proposals are designed to protect tenants that are unable to pay the rent, rather than those tenants who can pay their rent but choose not to.  How this distinction will be implemented in practice remains unknown.

Statutory Demands and Winding-up Order

A statutory demand is a formal written demand for payment of a debt. A landlord can serve a statutory demand on a tenant for unpaid rent, allowing them 21 days to make payment or agree the terms of a settlement before a petition is presented to the court seeking the winding up of the tenant.

A statutory demand can be used to support such petitions because non-payment of a statutory demand within 21 days may be deemed evidence of the debtor’s inability to pay its debts.

Under these new measures, any winding up petition that claims that the company is unable to pay its debts is likely to be reviewed by the court to determine why, before being issued. The law will not permit petitions to be presented or winding-up orders made, where the company’s inability to pay is as a result of Coronavirus.

There is no outright ban on presenting commercial tenants with statutory demands, and we would suggest that they may be appropriate if the tenant is simply trying to take advantage of the Coronavirus situation.  However, this new proposal will present landlords with an additional hurdle to overcome, making the process less attractive.

Commercial Rent Arrears Recovery (CRAR)

Commercial Rent Arrears Recovery (CRAR) allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them to recover the amount of the rent arrears.

As mentioned above, landlords will also be prevented from using CRAR unless they are owed at least 90 days of unpaid rent. Therefore, it is worth noting that if tenants are more than a quarter’s rent in arrears, CRAR could still be an available remedy for landlords.

Considerations for Commercial Tenants

The new measures will be in force until 30 June 2020 and may be extended further, in line with the moratorium on commercial lease forfeiture.

The government has encouraged tenants to pay what they can during the Coronavirus pandemic, but tenants need to bear in mind that, in the absence of an agreement with the landlord, they still owe all rent due. Landlords may also have a right to charge interest on the rent arrears, which will continue to accrue until paid.

What does this mean for Commercial Landlords?

Although the new measures are designed to protect tenants and secure jobs, landlords now have fewer options available to them to require tenants to pay rent. This could have a negative impact on a landlord’s income, financing arrangements and their ability to protect jobs.

Landlords may consider other methods to recover rent which have not been prohibited by government measures. This includes seeking payment from a guarantor, use of a rent deposit or issuing a debt claim. It may be that landlords become more prepared to issue proceedings as other remedies become less available.  The government have also pointed to the Coronavirus Business Interruption Loans Scheme to help landlords. Landlords may also wish to consider whether they have a business interruption insurance policy which might respond to the current situation.

Business secretary, Alok Sharma has urged Landlords to show forbearance to their tenants in these exceptional times. Therefore, it is important, now more than ever, for landlords to work closely with their tenants to reach agreements on debt obligations.

*The information set out in this article is correct at the date of publication (05 May, 2020). The effect of coronavirus on businesses is a fast-changing area and so it is important to obtain legal advice to ensure you are properly protected.

Contact us

If you have any questions regarding the impact of the Coronavirus upon your business or are seeking up-to-date legal advice on property dispute matters, contact Amelia Williams on 01202 294 566 or email [email protected]. Alternatively, contact a member of our Commercial Property team in Bournemouth.