UK government extends restrictions on commercial landlords’ enforcement options

Written on 17 Sep 2020

The existing restrictions on commercial landlords' ability to take enforcement action against commercial tenants who are in arrears of rent have been extended until the end of the year.

Forfeiture of commercial leases

The government has put in place regulations to extend the moratorium on forfeiture of commercial leases on the grounds of non-payment of rent until 31 December 2020. 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 some circumstances, what constitutes a reasonable period of time might be longer than usual, in light of the current government regulations regarding social distancing – and indeed, in the event of a future lockdown. 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 has also further restricted 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 latest extension means that in order for landlords to exercise rights under CRAR, 276 days of principal rent will need to be outstanding where the notice of enforcement is given on or before 24th 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).

Statutory demands

The government is yet to make an announcement in relation to the use of statutory demands to pursue rent arrears but it is widely expected that the current restrictions will be extended to follow suit. If it is not, the government's intention of assisting struggling tenants could be undone by landlords simply relying on serving statutory demands and then applying to wind up defaulting corporate tenants as opposed to seeking to forfeit the leases.

Response

The government's announcement has come as a boost to retailers and corporate occupiers (especially those in the hospitality and leisure sectors) who are seeking to recover from the economic setback of the Coronavirus pandemic and the difficulties they continue to face.

Conversely, commercial landlords will be worried that certain 'opportunistic' tenants who are able to pay their rent will abuse this legislation in order to improve their own short-term liquidity – at the expense of landlords, their lenders and SMEs that landlords would otherwise have greater capacity to assist.

The government has again encouraged landlords and tenants to co-operate and, where possible, comply with the (voluntary) Code of Practice announced earlier this year.