How can landlords enforce commercial rent arrears against tenants now the post-pandemic restrictions have been lifted?

Published on 14.11.22
Published on 14.11.22

Tenants of commercial property were granted various legal protections from their landlord taking action against them for non-payment of rent during the Covid-19 pandemic. With the last of these protections ending in September, we examine landlords’ current remedies when pursuing commercial rent arrears.

During the pandemic, the government introduced legislation to help businesses that could not pay their rent. This legislation protected a commercial tenant from their landlord forfeiting their lease for non-payment of rent, issuing a statutory demand or winding up petition, or using the commercial rent arrears recovery (CRAR) process.

On 25 March 2022, the government brought in the Commercial Rent (Coronavirus) Act 2022 (the Act), which provided a mechanism to help landlords and tenants resolve claims for rent arrears that had accrued during the pandemic. The Act allowed either the landlord or tenant to refer any arrears dispute to an arbitrator, who would decide what repayment terms would be binding on the parties.

The arbitration scheme only lasted until 23 September. Landlords were not permitted to pursue their usual remedies before this date (or after this date if an arbitration had already started).

The Act gave the government the ability to extend the initial six-month period beyond 23 September, but this did not take place. Accordingly, the Act expired on 23 September 2022 for tenants who had not yet applied for arbitration during the six-month window from 25 March. (Where arbitration is ongoing under the Act, the arrears to which the arbitration relates are known as “protected arrears”.)

Although the Act received substantial coverage in the property press, it appears that few tenants made use of it. This may be because commercial tenants were worried about the cost of going to arbitration, lacked knowledge of their rights under the Act or thought they would not obtain financial relief through arbitration.

Landlord’s options

Landlords may now employ the following remedies when dealing with unprotected commercial rent arrears.

Forfeiture

Landlords have a right to forfeit a lease if there are any outstanding unprotected arrears. However, before they bring an action for forfeiture, they should consider whether their conduct has amounted to a waiver of arrears and, therefore, if they have lost their right of re-entry or forfeiture for non-payment of rent.

If a landlord is aware of an existing breach of a lease and wants to forfeit, they must be careful not to do anything that acknowledges the continuing existence of the lease. Landlords should take a cautious approach and stop all communications with their tenant prior to forfeiture. When considering if landlords can negotiate with their tenants without waiving the right to forfeit, the facts and circumstances of the case must be considered, and it is recommended they seek legal advice.

Commercial Rent Arrears Recovery

Landlords can use the Commercial Rent Arrears Recovery procedure to seize their tenant’s goods and sell them to recover any unprotected arrears. From June 2021, landlords were prevented from using this statutory procedure unless an amount equal to at least 554 days’ rent was owed. The minimum amount outstanding before a landlord can exercise this remedy has now returned to pre-pandemic levels, being the equivalent of seven days’ unprotected rent debt.

Issuing debt proceedings

If a landlord is owed unprotected rent debt, they can issue court proceedings to recover it. However, where a tenant owes both protected and unprotected rent debt, landlords are advised to only issue proceedings in respect of unprotected rent to avoid the risk of their claim being struck out.

Arbitration under the Act

The Act provides that all outstanding disputes relating to protected rent debt must be settled using the arbitration scheme. While this option is intended to be efficient, there is scope for delays if an arbitrator must consider issues such as the practicality of a tenant’s business, the solvency of a landlord or whether the debt is protected.

The arbitrator may award a full or partial write-off of the debt, defer some or all of the debt for up to 24 months or order payment of the rent by the tenant with no concessions. The award will be binding with limited scope to appeal. The arbitration process is likely to be concluded between six to eight weeks or potentially several months for more complex matters.

Enforcing the payment of commercial rent arrears going forward

Overall, the expiry of the Commercial Rent (Coronavirus) Act 2022 Act is welcome news for landlords as they now have options available to tackle rent arrears regardless of the period they relate to.

Landlords have the option to enforce substantial payment of accumulated rental arrears despite this potentially negatively impacting the tenant in continuing their business. Landlords may also seek alternative remedies, as highlighted above. However, they must consider the potential pitfalls of exercising such remedies and should obtain legal advice should they require further guidance.

If you require further information on this article, please contact Chandni Kakkad at [email protected].

Disclaimer: The above is merely general guidance and should not be relied on as formal advice. We suggest you take professional advice before taking any action in relation to the issues discussed above.