Donald Lambert, Michael Gerken and Kerra Jelbert summarise the current regulations affecting recovery of possession and of arrears in both the commercial and residential sectors, and look ahead to what the future may hold.
The Covid-19 pandemic has been with us now for over 12 months. At the time of writing, we are part way through the third national lockdown. The Government has indicated that schools should start reopening on 8 March 2021, but there is no indication of when non-essential retail will reopen or when the directive to work from home ‘where possible’ will be eased.
The Government reacted to the extreme impact of the pandemic on the economy by implementing a range of restrictions on residential evictions and on the forfeiture of commercial leases. Those restrictions have now been in place in varying forms since March 2020.
As a result, levels of rent arrears have built substantially during this period. Remit Consulting reported a £4.2 billion shortfall in collection of commercial rents to late 2020. Even this figure is not the true extent of indebtedness as it excludes rent falling due on the December 2020 quarter day. In the residential sector, 56% of private landlords reported a loss of rental income during 2020 because of the Covid-19 pandemic, with 12% having lost more than 20% of that income, according to findings published last month by the National Residential Landlords Association.
Where does that leave property owners and occupiers in 2021?
The restrictions in England and Wales on: i) forfeiture; ii) Commercial Rent Arrears Recovery; and iii) presenting a winding-up petition for unpaid commercial rent arrears have all been extended to 31 March 2021.
The current options for recovery are as set out in the table below.
Current options for recovery of possession – commercial premises
|Forfeiture||Lease termination for failure to pay rent or other sums due under a lease is not permitted prior to 31 March 2021: the Business Tenancies (Protection from Forfeiture: Relevant Period) (Coronavirus) (England) (No 3) Regulations 2020. The future right to forfeit for current non-payment is however preserved.|
|Court proceedings for arrears of rent||This option remains available. The non-statutory Code of Practice for commercial property relationships during the Covid-19 pandemic encourages tenants to pay rent where they are able to. Anecdotally, this option has a greater impact on smaller tenants. Larger commercial tenants that wish to avoid payment are running a variety of defences including frustration and similar arguments.|
|Commercial Rent Arrears Recovery||CRAR allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them, or to serve a notice on a sub-tenant to pay its rent to the superior landlord in order to realise an amount to cover rent arrears. A minimum of 366 days’ rent must now be in arrear in order for a landlord to exercise CRAR during the period to 31 March 2021.|
Considerable restrictions on using insolvency proceedings to recover rent were introduced by the Corporate Insolvency and Governance Act 2020. These have also been extended to 31 March 2021 by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No 2) Regulations 2020. Winding-up will only be allowed where the company would be deemed insolvent notwithstanding the impact of Covid-19. This is determined by checks both at the point of issue of a petition and at the stage of considering whether to make a winding-up order.
|Claims against guarantors||This remains an available option.|
|Withdrawal from rent deposits||This remains an available option.|
|Enforcement of court judgments||Judgments can be enforced by charging orders over property in the usual way. Warrants to seize goods are subject to practical delays due to court delays and Covid-safe working practices by enforcement officers.|
The Corporate Insolvency and Governance Act 2020 has introduced a new stand-alone moratorium procedure for companies experiencing financial difficulty – allowing the company’s directors, together with a licensed insolvency practitioner ‘monitor’, to retain control of the company’s affairs while assessing the options available to save it as a going concern.
The initial moratorium period is for 20 business days, but this can be extended by a further 20 business days without creditor consent – or up to one year with creditor consent.
During the moratorium, the permission of the court is needed before the landlord is allowed to:
Residential landlords are used to their sector being heavily regulated, but given the pace of change since the introduction of the Coronavirus Act 2020, even seasoned experts in this field can be forgiven for not keeping up with the changing rules on possession proceedings and evictions.
The Government has sought to limit the prospects of homelessness triggered by the pandemic by intervening in the following policy areas of the residential rental sector:
For a summary of the current position, see the table below.
Recovery of possession – residential premises
|Date of action||Notice period required to terminate under section 8 of the Housing Act 1988||Notice period required to terminate under section 21 of the Housing Act 1988||Are possession proceedings possible?||Can I enforce a repossession warrant?|
|Between 11 January 2021 and 31 March 2021||Six months – if less than six months' rent arrears. Four weeks – if six months’ rent arrears or more. Four weeks – in event of serious antisocial behaviour||Six months||Yes||Yes, but only in limited circumstances up to 31 March 2021. Restrictions to be eased after this date.|
From 4 May 2021, residential landlords will also need to consider whether a debt moratorium or ‘breathing space’ is in place under the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020. These regulations will apply to most debts including rent arrears and monies owed in relation to an order or repossession warrant of a tenant’s place of residence.
There are two types of moratorium:
During a breathing space:
After a moratorium, a landlord must not require the tenant to pay interest, fees, penalties or charges that accrued during the moratorium.
For commercial landlords, the current restrictions may well be extended or amended when they are due to expire, particularly if there is still a widespread lockdown. This is likely to be followed by a gradual easing of restrictions on the recovery of possession and on the use of insolvency proceedings.
New court rules are being drafted to ration the use of insolvency proceedings once the current restrictions end. The aim of these measures is to avoid the courts being overrun.
The Government needs to give residential landlords and tenants more assistance, not just delay the inevitable prospect of tenants losing their homes due to the accrual of mounting arrears brought on by the impact of the pandemic on their livelihoods. It cannot expect landlords to bear the burden of unpaid rent arrears. As Baroness Altman said during the 2 February 2021 debate on the Public Health (Coronavirus) (Protection from Eviction) (England) Regulations 2021: “Private landlords cannot be expected to continue to effectively pay to house people for free. That is a government role.”
The Government has already legislated to give both corporate debtors and individuals more space in which to renegotiate their obligations or enter into formal insolvency processes. Ultimately, the levels of indebtedness incurred during the current pandemic will require restructuring where the debtor cannot repay its obligations. The open question is: to what extent will landlords be free to recover possession from those tenants who cannot or will not pay rent?
The legislation in this area continues to evolve. This article reflects the law as set out on 15 February 2021.
This article was published in Estates Gazette in February 2021.