Forfeiture v Commercial Rent Arrears Recovery
Commercial landlords have always had recourse to, and used the right of, re-entry under a business tenancy for non-payment of rent. The threat of having your lease forfeited has been an effective tool for landlords to extract payment of rent from tenants.
However, the Coronavirus Act 2020 has restricted a landlord’s ability to use this threat to encourage a tenant to pay their rent arrears. A moratorium on forfeiture for non-payment of rent was originally put in place until 30th June 2020, this was later extended until 31st December 2020, and now 31st March 2021.
Although forfeiture will be back on the table after March 2021, landlords will need to consider whether the threat of forfeiture is still in their best interests. Does a landlord want to forfeit a lease and be left with empty premises for which it is not receiving any rental income and for which it is responsible for the rates and insurance? How quickly will a landlord be able to find a new tenant? How much rent will the landlord be able to agree with a new tenant?
So, what are the alternatives to forfeiture?
Commercial Rent Arrears Recovery (“CRAR”) allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover funds equivalent in value to the rent arrears.
However, the Government introduced The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020. This legislation had the aim of protecting tenants of commercial leases from a landlord exercising CRAR. The legislation increased the minimum amount of net unpaid rent that must be outstanding before a landlord could exercise CRAR during a specified ‘relevant period’.
The level of rent arrears required was increased from the equivalent of 7 days rent to 90 days rent. This was further increased to 276 days rent and as of 25th December 2020 increases to 366 days rent. The relevant period during which these rules apply was has now been extended until 31st March 2021.
This means that CRAR can only be used in the following circumstances:
Therefore, although CRAR can still be exercised, the large amount of rent arrears now required to take action make it an unappealing option.
Another alternative is negotiation directly with the tenant. This is an option certainly favoured by the Government with guidance to support negotiations to be published shortly. Indeed, the most recent extension to the forfeiture moratorium and CRAR relevant period is described as a “final extension” to allow landlords and tenants to reach agreement on a payment plan or an agreed rent reduction. That being said, the Government do make it clear that where businesses can pay any or all of their rent, they should do so.
Potentially negotiation may offer a better solution to a landlord who will then be in receipt of some rent, have an occupied property, have an insured property, and have a tenant responsible for repairs, maintenance and paying the business rates.
As always, a landlord needs also to consider if there are other breaches of lease by the tenant such as sharing occupation or failing to repair and maintain a property which are not affected by CRAR. The landlord may want to deal with these breaches by gaining the cooperation of the tenant to comply with these covenants and which may be of more value to the landlord whilst at the same time agreeing a rent arrears payment plan with the tenant.
In summary, landlords need to consider taking any action in the new context of the COVID-19 affected commercial property market. They will also need to consider the announced review of commercial landlord and tenant legislation taking place in early 2021. This will include consideration of Part II of the Landlord and Tenant Act 1954, different models of rent payment and the impact of COVID-19 on the market.
Pinney Talfourd are experts in Commerial Property Litigation and can advise you on changes to the law so you are given up to date advice.
Please do not hesitate to contact Lisa Eastwood on 01708 463215 should you wish to discuss anything further.
This article was written by Lisa Eastwood, a Senior Associate in our Commercial Property Litigation team. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of December 2020.