Commercial property owners have been in negotiations with their tenants in anticipation of the lifting of the restrictions on enforcement action on 30 June 2021. However, all commercial tenants will now benefit from a further extension meaning that the restrictions on forfeiture and commercial rent arrears recovery (CRAR) will apply until 25 March 2022 and the restrictions on statutory demands and winding up petitions until 30 September 2021.
No forfeiture for rent arrears
Further regulations will extend the moratorium meaning that the earliest a landlord can forfeit a commercial lease for non-payment of rent is now 26 March 2022.
Until then, forfeiture will remain available as a method of enforcing any tenant breaches other than failure to pay rent. This right to forfeit will remain conditional on landlords complying with the statutory process which includes giving the tenant reasonable time to remedy any breach. In light of the current government regulations regarding social distancing and the restrictions in place across the UK, what constitutes a reasonable period of time is likely to be longer than usual. This method of enforcement could also be made more difficult in light of the backlog of claims being dealt with by the courts.
In reality, therefore, forfeiture will only be an effective remedy for commercial landlords in the most exceptional circumstances.
Extension of restrictions on CRAR
The government will also extend the restrictions on landlords' ability to exercise their rights under the CRAR procedure. CRAR allows a landlord to seize and sell tenant assets to cover rent arrears but thresholds have been applied to require increasing levels of arrears before CRAR can be used:
- where CRAR is exercised between 25 March and 23 June 2021, 457 days' worth of principal rent must be outstanding; and
- where CRAR is being exercised between 24 June 2021 and 25 March 2022, 554 days' worth of principal rent must be outstanding.
Restrictions on statutory demands
Statutory demands have often been an extremely effective way of securing payment of commercial rent arrears from tenants, given that a failure to pay the sums due within the 21 day deadline can lead to a petition being issued to have a tenant wound-up. However, the existing restrictions will remain in place for a further three months until 30 September 2021.
Osborne Clarke comment
While welcomed by tenants continuing to struggle amid the ongoing impact of pandemic-related business closures and restrictions, this development will concern many landlords. There has been much criticism of well-capitalised tenants who are seen to be taking advantage of the moratorium to improve their short-term cash-flow. Capital investment into UK commercial real estate would normally be expected to amount to over £60 billion each year but levels may well be reduced in light of these undifferentiated restrictions. In addition, asset managers will have less money to spend on their buildings, potentially risking the town centre recovery agenda.
In addition to the blanket extension to the current restrictions, the government has announced that it intends to pass further legislation affecting the contractual relationship between commercial landlords and tenants.
In a welcome change to the nature of the restrictions to date, these measures will be targeted specifically at those affected by pandemic-related closures. It will aim to facilitate resolution of disputes over rent arrears where a tenant was prevented from opening its business with a binding arbitration process coming into play if the parties are unable to reach agreement.
Look out for our next insight when the detail becomes available.
This article was produced with the assistance of Holly Baker, Trainee Solicitor.