What Happens if your Commercial Tenant Doesn’t Pay the Rent
What is the Landlord's position under the current coronavirus restrictions, if its Tenant of commercial property doesn't pay the rent when it falls due - this article concentrates on just commercial property, the position is different with regard to residential property.
In normal times, a tenant who does not pay rent in accordance with the terms of a commercial Lease is under immediate risk of forfeiture by the landlord. Most Leases contain a forfeiture re-entry clause which allows the landlord to bring the Lease to an end if any rents as defined by the Lease are unpaid for a certain period of time (usually 14 - 28 days). The landlord forfeits the Lease by re-entering the premises and changing the locks so as to exclude the tenant or serving Court proceedings. Often no advance warning is necessary and therefore the advice to tenants has always been to prioritise payment of commercial rent.
However, as part of the measures aimed to help businesses to trade through the coronavirus pandemic, the Government has imposed a moratorium on forfeiture in commercial Leases with a term of more than 6 months. The moratorium was imposed by The Coronavirus Act 2020 and has been extended currently to 30 September 2020.
There is no distinction as to when the arrears accrued or why, so it makes no difference to the suspension of the landlord's right to forfeit that the arrears might pre-date the pandemic or that the pandemic is not the cause of a tenant's inability to pay the rent.
The Coronavirus Act moratorium also prevents the landlord from utilising the special procedures under Commercial Rent Arrears Recovery which in normal circumstances enables certificated Bailiffs to recover unpaid rent by removing and selling the tenant's goods (formerly known as distraint) without a Court judgement.
The moratorium does not however prevent the landlord from bringing a debt claim in the County Court to obtain a County Court judgment which can then be enforced or from taking insolvency proceedings by serving a statutory demand and ultimately petitioning to bankrupt an individual tenant or to wind up a company tenant in an insolvent liquidation.
Whilst some landlords will be under financial pressure themselves and might need to take immediate legal action to protect their own position with Lenders, very careful consideration has to be given before deciding to forfeit a Lease or to force a tenant company or a tenant into insolvency. Forfeiture is effectively an immediate lock-out eviction which brings the Lease to an end. Whilst some tenants will want to reopen premises and would then be forced to agree terms for relief from forfeiture, the ultimate position is that the landlord is likely to have an empty property on its hands with void liabilities such as insurance and business rates. The same will happen if the tenant is made bankrupt or wound up through an insolvent liquidation. The bankruptcy trustee or the liquidator will disclaim the Lease which brings it to an immediate end.
In some cases, the landlords may hold a rent deposit, and this provides landlords with some breathing space. Rent can still be drawn down from the rent deposit during the moratorium period and when the moratorium is lifted the tenant will be liable to forfeiture if it does not reinstate the rent deposit account.
Also, there is no restriction on legal action being taken against guarantors or former tenants under an Authorised Guarantee Agreement. This can bring significant pressure to bear on the tenant to pay the rent in order to avoid enforcement against third party guarantors. There are strict statutory time limits and notice requirements for claims under Authorised Guarantee Agreements and most contractual guarantees have notice requirements, so it is very important not to overlook them during the moratorium period. Even if the landlord does not intend to take immediate enforcement action against the guarantor for the time being, notice of arrears must still be given within the prescribed time limits in order to safeguard the landlord's position under the guarantee.
If you would like to have a discussion about any of the above, or for further information please get in touch with your regular point of contact at Band Hatton Button, or any member of our commercial property or commercial litigation teams.
Philip Costigan & Jonathan Wilby