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Covid-19: update on collection of commercial rents

Posted: 06/05/2020

The Government has already taken steps to prevent landlords of commercial premises in England and Wales from forfeiting leases for arrears of rent. This restriction presently lasts until 30 June 2020, but may be extended.

Impact on payment of rent

Rent due was not forgiven and landlords were still able to take various enforcement steps to recover rent, including the use of insolvency proceedings.

Nevertheless, rent collection by large commercial landlords covering the March quarter was very significantly reduced. Estates Gazette reported that the shopping centre landlord INTU only collected 40% of rent due. Landlords of offices report rent collection of around 70% of sums payable and even the distribution/warehouse landlord SEGRO only collected 71% of rents on the due date.

Press reports include allegations that those seeking to delay or avoid payment include a number of well capitalised businesses which are able to pay but have chosen not to.

Limit on the use of insolvency proceedings

The Government has now responded to complaints from retailers that the use of insolvency proceedings was inappropriate during the coronavirus emergency. It has announced that statutory demands issued between 1 March 2020 and 30 June 2020 and winding up petitions issued between 27 April and 30 June will be void “where a company cannot pay its bills due to coronavirus”.

This step will require primary legislation. No detailed proposals have been published so it is unclear how the courts will identify companies that are suffering from coronavirus-induced difficulties as opposed to those which have been in a weak financial position for some time.

It is also not clear whether these provisions will limit insolvency proceedings in all fields or only in the area of commercial rent arrears.

The intention is to include these provisions in forthcoming legislation designed to update insolvency law, which would include changes to the liabilities of directors, limits on the powers for suppliers to cancel contracts due to insolvency, and new forms of restructuring.

Limits on seizure of goods to settle rent arrears

The Chancellor also announced the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 which are now in force.

The Regulations amend the right of landlords to levy Commercial Rent Arrears Recovery (CRAR) during the coronavirus emergency.

Whilst the regulation remains in force, CRAR cannot take place until a sum equivalent to 90 days’ rent is outstanding. It is the amount of rent which is owed and not the time for which the rent has been outstanding which is crucial. For these purposes rent only includes the charge for use and occupation and interest. It does not include sums such as service charges and insurance premiums.

Where certificates of enforcement are already in place and have less than three months left to run, such certificates are all automatically extended by six months.

The right to recover rent from a sub-tenant by giving notice under s81 of the Tribunals Court and Enforcement Act 2007 is also altered by the Regulations and again depends on there being at least 90 days of rent in arrears.

The Regulations mean that a tenant can gain temporary protection from CRAR by reducing arrears below 90 days of rent.

Remaining rent recovery options

The following steps are still available in appropriate cases:

  • withdrawals from rent deposits;
  • demands against guarantors;
  • notice to sub-tenant to pay where over 90 days of rent is outstanding; and
  • debt proceedings in court.

All of these options have their limitations. Extending the pool of those with liability to pay to guarantors and sub-tenants may do the most to increase medium-term prospects of payment.

What happens now?

The continuing Covid-19 emergency will clearly have major financial implications for both landlords and tenants. While the Government has encouraged parties to discuss cash flow and other problems in the payment of rent, they have not made wide-ranging proposals that would address the mounting issue of non-payment of rent. Already, INTU has been threatened with having assets seized by its bondholders.

If the pattern of non-payment continues for the June quarter due date, then it appears inevitable that the autumn will bring a wave of insolvencies in order to restructure debts, including rent arrears. The property sector has already seen a number of high profile restructurings in recent years, using CVAs to reduce rents.

Landlords have complained that they have been singled out unfairly by these arrangements and have not been treated equally with other classes of creditors. This is in part due to the weighting of votes in favour of trade and financial creditors owed current sums as opposed to landlords owed future sums under leases. It may be that the next round of such CVAs will have to be structured differently because large sums of current rent arrears will materially increase the voting powers of landlords.

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