UK government to extend restrictions on commercial landlords' enforcement options
Published on 9th Dec 2020
The existing restrictions on commercial landlords' ability to take enforcement action against commercial tenants who are in arrears of rent will be extended until 31 March 2021.
The government has also announced that there will be both a review of "outdated" commercial landlord and tenant legislation and guidance to support negotiations between landlords and tenants, which will be supplemental to the Code of Practice published in June 2020. It is not clear which legislation the government intends to review. But change is likely as the government holds the view that the legislative framework "does not reflect the current economic conditions" and that better collaboration between commercial landlords and tenants is needed.
The government's review will also consider ways to 'improve the leasing process' to enable town centres and high streets to recover from the pandemic. Landlords will be hoping that the outcome of this review does not result in an abolition of certain enforcement options that have always been available prior to the government's measures imposed as a result of the Coronavirus pandemic.
In the meantime, landlords' methods of enforcement are restricted as follows:
Forfeiture of commercial leases
The existing moratorium on forfeiture of commercial lease on the grounds of non-payment of rent was due to expire on 31 December 2020. The government has announced today that further regulations will be put in place to extend the moratorium until 31 March 2021. In its announcement, the government intimated that this will be the final extension. In the absence of further legislation, landlords will be able to forfeit for non-payment of rent from 1 April 2021.
Until then, forfeiture will remain available as an enforcement method in respect of breaches other than non-payment of rent. This remains subject to landlords complying with the statutory restrictions of service of a notice under section 146 of the Law of Property Act 1925 and giving the tenant a reasonable period of time to remedy the breach(es).
In light of the current government regulations regarding social distancing and restrictions in place across the UK, what constitutes a reasonable period of time might 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.
Commercial Rent Arrears Recovery
In addition to the extension of the forfeiture moratorium, the government will also put in place new regulations to further restrict landlords' ability to exercise their rights under the Commercial Rent Arrears Recovery (CRAR) procedure.
Under CRAR, if a tenant is in arrears of a certain level of rent, a landlord can serve a notice on the tenant demanding payment. If the sums are not repaid, the landlord can instruct an enforcement agent to follow a statutory procedure and seize assets held by the tenant. Those goods would then be sold at auction and the proceeds of sale used to repay the arrears owed to the landlord.
In order to help tenants deal with the economic impact of the Coronavirus pandemic, the government has continued to increase the threshold amount of arrears that must be due in order for a landlord to exercise its rights under the CRAR procedure.
The existing threshold, introduced in September, meant that in order for landlords to exercise rights under CRAR, 276 days of principal rent needed to be outstanding where the notice of enforcement was given on or before 24 December 2020, rising to 366 days of principal rent for notices from 25 December 2020 (being the equivalent of just over three and four quarters' rent, respectively).
The new regulations announced today will further increase the threshold amount of arrears required in order for landlords to exercise the CRAR procedure. The precise details will not be known until the relevant regulations are published.
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.
When the Corporate Governance and Insolvency Act came into force earlier this year, landlords were, to all intents and purposes, prevented from utilising this method of enforcement. The restrictions were subsequently extended to 31 December 2020. A further extension beyond 31 December was by no means out of the question and the government has today announced further restrictions on the ability of landlords to use this method of enforcement, up until 31 March 2021.
This will cause concern for some landlords who believe that the government restrictions are being abused by certain tenants which have the means to pay, but are refusing to do so in order to negotiate rent reductions or improve their short-term cash-flow. Faced with non-payment, landlords must currently choose between negotiating concessions or issuing a claim at court for the sums due.