Can't Pay Won't Pay - The Reynolds Report

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With much current talk of the Government encouraging cooperation between Commercial Landlords and their Tenants in relation to payment of rent (and other sums due under their Leases), the Property & Commercial Department at Barrett & Co would be delighted to help both Landlords and Tenants formalise any such agreements they may reach. 

Summary forfeiture (or ‘peaceful repossession’) for non-payment of rent has long been a key weapon in the Commercial Landlord’s armory.  Whilst breach of other clauses in a Commercial Lease requires the service of notice specifying the breach and allowing (where rectification is possible) an appropriate period for rectification (a ‘section 146 Notice’ – referring to section 146 of the Law of Property Act 1925) these restrictions do not apply to non-payment of rent (and other sums defined as ‘Rent’ in the Lease – so, frequently, Service Charges, insurance contributions etc).  

When ‘Rent’ under the Lease was unpaid the Landord could, provided the Lease was appropriately drafted, turn up at the premises, change the locks and exclude the Tenant.  The Tenant would then be faced with the lengthy process of obtaining ‘relief from forfeiture’ which, at best, involved paying off any arrears plus the costs of forfeiture – at worst it may fail, leaving the Tenant permanently excluded. 

Section 82 of the Coronavirus Act 2020 banned Landlords from forfeiting commercial premises during the ‘emergency period’ – currently running to 30 June 2020.  At the same time a moratorium was introduced for Court proceedings seeking possession orders for commercial premises running for the same period. 

Together these items represented a huge shift in the balance of power between Commercial Landlords and their Tenants. 

Commercial Landlords (and their advisers) are, however, a creative bunch.  Very quickly some, more aggressive Landlords came up with two other ways of pursuing urgent payment of unsatisfied Rent liabilities: 

  1. Through use of the Commercial Rent Arrears Recovery procedure (‘CRAR’) (itself a much-maligned successor to the previous regime of ‘distress for rent’); and/or 
  2. Through the service of Statutory Demands and/or Winding-up Petitions based on unpaid Rent liabilities. 

The Government therefore had to take further, urgent, steps to encourage these Landlords to come to the negotiating table: 

  1. The intention is to lay secondary legislation to provide Tenants with more ‘breathing space’ to pay Rent by preventing Landlords using CRAR unless they are owed 90 days of unpaid Rent’; and   
  2. The Government has also temporarily banned the use of Statutory Demands (made between 1 March 2020 and 30 June 2020) and Winding up Petitions (presented from Monday 27 April 2020 through to June 2020) where a company cannot pay its bills due to coronavirus.  Any Petition which claims that a company is unable to pay its debts will first be reviewed by the Court to determine why.  Petitions will not be permitted, nor Winding-up Orders made where a company’s inability to pay is a result of Coronavirus. 

The overall upshot is, then, that even the most reluctant of Commercial Landlords are being compelled to negotiate with their Tenants and the Agents acting for Commercial Landlords can expect a flood of calls from Tenants (or, if they are better advised, Commercial Agents acting for those Tenants) seeking to ‘renegotiate’ the terms of their Leases.  Changes Tenants will seek may include: 

  1. Rent holidays (ie pay no rent)
  2. Rent reductions (pay less rent); and/or 
  3. Move to monthly payments rather than quarterly. 

Few Commercial Landlords are likely, even in the current climate, to give anything for nothing (nor are their Agents likely to advise them to do so).  ‘Pay back’ required in exchange for the concessions being sought above might include: 

  1. Extension of Lease term; 
  2. Removal/adjustment of Break Clauses; and/or 
  3. Any payments not made not simply being lost but, rather, being spread over the balance of the Lease Term once payments recommence.

Also concessions may be forthcoming in relation to ‘headline’ rent but not other sums payable under the Lease (Service Charge, Insurance Premiums etc). 

All of this may seem to fly in the face of the Government urging Landlords and Tenants to ‘work collaboratively’ during the Pandemic, but Landlords are subject to commercial pressures too – particularly from lenders who have funded the purchase/construction of the properties being let out – who, in turn, are having to deal with the more ‘nuanced’ reality behind the Government’s loud trumpeting of huge sums of money being available to support businesses when income streams contract (or disappear) due to COVID-19.

Which brings me, then, to the final point of this ‘Report’:

Most Leases are ‘legal estates in land’ and will be created by Deed (a formal contract with witnessed signatures).  On the basis of the principle ‘it takes a Deed to vary a Deed,’ however clever and collaborative any compromises agreed between Landlords and Tenants (or their respective Agents) may be, they will have to be formalized in a Deed of Variation in order to be properly effective.    The Property & Commercial Department at Barret &  Co would be delighted to assist both Commercial Landlords and Tenants with this process. 

Get in Touch

If you are a Commercial Landlord or Tenant and have any questions please contact Martin Reyolds on 0118 958 9711, or email [email protected].

Further Reading:

COVID-19: Buying and Selling your Home. What Do I Do?

First Court of Protection Trial via Skype Branded a Success

Tenants Fees Act overhauls fees for renters!

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