15 May 2020 #Commercial Real Estate
In addition to the passing of the Coronavirus Act 2020 which introduced a three month moratorium on evictions of commercial tenants for non-payment of rent, the Government has provided further protection for commercial tenants under the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 with yet further changes proposed under the ‘Corporate Insolvency and Governance Bill’. With so much protection available for commercial tenants its begs the question do commercial landlords need protection too?
The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 were passed on 25 April 2020 and place restrictions on a landlord’s ability to exercise their right under the Commercial Rent Arrears Recovery Procedure (CRAR). The restrictions mean that a landlord will have to wait until a tenant is in at least 90 days’ worth of rent arrears (rather than 7) before the service of a notice demanding payment and if such sums remain unpaid the instruction of an enforcement agent to seize goods and assets held by the tenant.
The full detail of the Corporate Insolvency and Governance Bill is yet to be published, however, its introduction is said to be in response to “aggressive” debt recovery practices, including the service of statutory demands on tenants to pressure them to pay their rent. As such it plugs a potential hole left behind by the Coronavirus Act 2020.
The key features of the ‘Corporate Insolvency and Governance Bill’ are likely to include a ban on the use of statutory demands made between 1 March and 30 June 2020 and winding up petitions presented from 27 April through to 30 June 2020 against tenant companies unable to pay amounts owed due to coronavirus; and
While protection for commercial tenants is welcome, increasingly there is an argument that this comes at the cost of commercial landlords, for whom so far, the Government has not likewise offered any financial support or protection from unscrupulous tenants. In addition, while much of the press coverage of the 11 March 2002 budget focused on measures to support business affected by coronavirus, the announcement in the budget of the reintroduction of ‘crown preference’ on 1 December 2020 means that HMRC will once again rank as a preferential creditor in an insolvency. Commercial Landlords trying to recover rent from 1 December onwards will therefore find it more difficult and will potentially be pushed further down the queue.
Over the last few days, a collective known as the ‘Landlord’s Union’ made up of 30 property investors has started to lobby the government to change tack on its rescue plan for the high street and the broader private sector. The group state that the measures introduced to date mean that tenants have been given carte blanche to withhold rents. They report that while a number of well-known high street chains have continued to trade during the lockdown, they have been paying little if any rent and as such commercial landlords have been asked to provide a financial backstop for huge swathes of the economy.
So what recourse does a commercial landlord have and what might the Government do to assist?
It is important to remember that none of the measures introduced by the Government affect a tenant’s liability to pay rent. A tenant is still liable to pay all sums due under their lease and as such the measures introduced so far are intended to give ‘breathing space’ and not immunity.
The Government has reiterated that it is trying to encourage a dialogue between landlords and tenants, so that they can try to reach mutually acceptable compromises in respect of sums owing and falling due under leases during the coronavirus lockdown. The key message remains that landlords and tenants should continue to work together, and tenants are urged to pay rent if they can afford to do so.
If a compromise is reached for example, a reduced rent or a rent-free period, it is important that the parties properly document what has been agreed to avoid potential disputes arising in future.
If the parties fail to reach a compromise, that is not to say a landlord can’t take action to enforce (for example) non-payment of rent but rather that the timing of such action is delayed at the current time. Even though their options are limited, landlords can still consider issuing a debt claim at court, drawing down against rent deposits, or (where applicable) seeking to pursue third parties who may have liability (guarantors, or former tenants under the lease).
So far there has been no indication from the government that it intends to take any steps to assist commercial landlords to cope with the effect of the lockdown. The British Property Federation has reported that in the March quarter office tenants paid about two thirds of their £2.1 billion rent bill and that this sum is expected to halve in June. With the June quarter fast approaching, pressure is mounting for support to be given to commercial landlords.
One obvious step would be to introduce legislation which prevents financial institutions from exercising rights under their agreements with landlords, where an event of default occurs as a result of tenants failing to pay their rent. This would mirror the legislation brought in to protect tenants.
Alternatively, some industry commentators have suggested that we should adopt a “space furlough scheme” similar to that introduced in Denmark, which would see landlords agreeing and tenant’s paying reduced rent while the treasury plugs the gap. There is a suggestion that this proposal could focus on the hardest hit sectors (retail and leisure) and offer a ‘sliding scale’ of support. Other suggestions include a grant scheme to cover some rent bills and a waiving tax on landlords with empty properties.
It is clear that the impact of the coronavirus lockdown affects commercial tenants and commercial landlords alike, as such it is important that any measures put in place likewise offer protection for both. In the meantime, it is essential that commercial tenants and commercial landlords continue to work together and reach compromises to benefit them both in these difficult times.