The government has further extended the restrictions on the ability of landlords to recover rent arrears from commercial tenants under business leases.

Commercial Landlord and Tenant Update including the Six-month Deadline for Pursuing Past Tenants and Guarantors

New Measures

The moratorium on forfeiture based upon non-payment of rent has been extended from 30 June until 30 September.

Action through enforcement agents under Commercial Rent Arrears Recovery (CRAR) is  only permitted in the event of 189 days of unpaid rent as at 30 September 2020.  This means that a tenant will not be subject to enforcement action even if no rent payments have been paid over two quarters.  

The Corporate Insolvency and Governance Act 2020 has extended the ban on the use of statutory demands and winding up petitions where a company cannot pay its bills due to the COVID-19 pandemic until 30 September 2020.

A New Code of Practice

The government have issued a voluntary code for landlords and tenants of commercial property effective until 24 June 2021. Named the Code of practice for commercial property relationships during the COVID-19 pandemic (“the Code”) it is designed to promote good practice and “to support businesses to come together to negotiate affordable rental agreements”.  

The Code also provides guidance in relation to the landlord’s recovery of service charge.  In particular, where the use of the property has lowered the service charge cost, this reduction should be passed onto tenants.

A copy of the Code can be found by clicking here: https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector/code-of-practice-for-commercial-property-relationships-during-the-covid-19-pandemic

Landlords Options

The main options for landlords continue to remain money claims for outstanding rent, rent deposit deductions, administration orders, forfeiture based upon other breaches of covenant such as disrepair and/or pursuit of guarantors and former tenants.

Tenants Options

Tenants will be aware that the restrictions set out above are moratoriums only and that rent will have to be paid in the future.  Tenants should therefore plan, negotiate and make rental plan arrangements under the Code wherever possible.  Alternatively, tenants should be looking to exercise break options or to negotiate beneficial lease terms such as rent-free periods, monthly rental payment, capped rent/service charges or rent calculated as a percentage of turnover rather than the usual open market rent.  

The Six Month Rule

Landlords of commercial property should be aware that strict time limits apply in the event that they wish to pursue past tenants or their guarantors for unpaid rent.

Where, under a commercial lease, there are prior tenants and/or guarantors, commercial landlords should consider whether enforcement for unpaid rent can be pursued.  

Not all past tenants or their guarantors who have assigned a lease will still be liable for rent. This will depend upon whether a lease is granted on or after 01 January 1996 and whether an Authorised Guarantee Agreement (“AGA”) was entered into.  

The first step is to seek recovery from the current tenant and any current guarantor.

However, within 6 months of the debt falling due, a former tenant or former guarantor who has a liability under a lease can be served with a Section 17 notice.  

If a landlord fails to serve a Section 17 notice on a former tenant or a former guarantor within the 6-month period, the former tenant or the former guarantor is no longer liable for the unpaid rent.

It should be noted that a former tenant or a former guarantor who receives a Section 17 notice and makes payment in full can call for an overriding lease and become a direct tenant of the landlord.

Should you require any further information regarding commercial property disputes including rent recovery, please do not hesitate to contact our Bill Dhariwal, Managing Director, Lawcomm Solicitors, DDI: 01489 864 117, E: bill.dhariwal@lawcomm.co.uk

Please note: The above article was written on 25 June 2020 and does not constitute specific legal advice.