As we reported recently, the binding arbitration process to deal with lockdown rent arrears in England and Wales introduced by the Commercial Rent (Coronavirus) Act 2022 has now closed to new referrals. Where no arbitration has been commenced, Landlords of commercial premises can now use any of the old methods of enforcement to recover rent arrears. In this respect at least, the "new normal" is remarkably similar to the "old normal".
Given it has now been more than two years since landlords could use these methods without needing to consider various pieces of Coronavirus legislation it is worth revisiting exactly what the "usual" methods are and in what circumstances each is appropriate.
Landlords can (in nearly all cases) terminate leases for non-payment of rent through a process known as forfeiture. Forfeiture can be effected either by simply changing the locks (known as peaceable re-entry) or by the issue and service of Court proceedings. For non-payment of rent, there is no need to give the tenant any prior notice before exercising this right, although leases typically give the tenant a short grace period before a landlord can forfeit.
It is important to remember that a tenant will be able to apply to the Court for 'relief from forfeiture' – essentially asking for its lease to be reinstated. If the tenant pays the rent arrears and the landlord's costs of the forfeiture then it will likely (and in some cases automatically) be given relief and the lease will continue as if never terminated.
Forfeiture can therefore be a very effective way of achieving recovery of rent arrears. If peaceable re-entry is adopted, being locked out of its premises provides a strong incentive for a tenant to make a payment and a relief application.
However, it is not suitable in all cases. Most obviously this is the case if the landlord does not wish to recover possession of the property. Landlords also need to be sure that the right has properly arisen and that they have not waived the right to forfeit by continuing to acknowledge the lease (which can easily be done inadvertently). Changing the locks where there is no right to do so will expose landlords to a claim for wrongful forfeiture and there are strict requirements on the process of changing the locks that carry criminal sanctions if breached. Legal advice should always be sought prior to taking action.
Landlords with an undisputed debt above certain thresholds can apply to the Court to place tenants into insolvency: bankruptcy in the case of an individual and a compulsory winding up in the case of a company. In the former case, a statutory demand must first be served giving a tenant 21 days to pay. In the latter, whilst there is no requirement to provide any prior notice, it is generally advisable to send a letter threatening winding up if payment is not made within a specified time.
The threat of a insolvency can be a strong incentive to pay. The mere presentation of a winding up or bankruptcy petition will have significant repercussions for a tenant and they will generally want to avoid those if at all possible.
The major drawback of this method is that it is ultimately a joint remedy for all creditors. Once a petition has been issued and advertised in the Gazette, the matter will, to a certain extent, be out of the landlord's hands. Other creditors may join in on the petition. If the tenant is wound up or declared bankrupt then its assets will be split between creditors and, in many cases, full recovery for the landlord will be unlikely.
Debt Recovery Proceedings (CCJ)
This involves issuing a money claim in the Courts. If successful, a landlord would be able to adopt one of the methods of enforcing a Court judgment, which are more extensive than those set out here.
This method can be appropriate if a tenant has a valuable property over which a landlord could obtain a charging order or valuable goods at other premises that could be seized. However, although it is often possible to obtain default or summary judgment, it can be a long process to obtain judgment and it will take even longer to enforce that judgment. During that period, there may be little incentive for the tenant to pay.
Commercial Rent Arrears Recovery ("CRAR")
CRAR involves instructing licenced enforcement agents to take possession of items present in the tenant's demised property to cover the cost of unpaid principal rent (and not service charge or other sums due).
This can be a relatively simple enforcement method if the tenant has valuable goods at the premises. However, there is a strict procedure which must be followed, including providing at least seven days' notice and requirements for the sale process. There are also extensive exceptions to the goods that can be seized.
If a landlord has a rent deposit then it may be able to drawdown on this to cover the arrears.
This is a quick and easy method to recover arrears and tenants are usually required to top-up a depleted deposit. However, landlords may often be better advised to keep the rent deposit in place so that it can be used for other breaches (such as future arrears or dilapidations).
Landlord can also pursue any guarantor for the arrears – either a guarantor under the lease or former tenants who have given an AGA (or, in a pre-1 January 1996 lease, bound by privity of contract).
This can be an effective enforcement mechanism if a guarantor or former tenant has a stronger financial covenant that the tenant itself. Landlords should be aware that if pursuing a former tenant, a notice must be served within six months of the arrears becoming due and the former tenant can obtain an overriding lease of the premises if the arrears are paid.
It is always worth remembering that in some circumstances a negotiated solution – such as a payment plan or lease re-gear – may provide a better solution for all parties. These negotiations can, of course, be run on a without prejudice basis in parallel with one of the enforcement methods described above.
If you are a commercial landlord or tenant with concerns or queries about commercial rent arrears or, how the closure of the arbitration scheme may impact you or your business, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies contact.