24th August 2021
The moratorium on commercial lease forfeiture has been extended, yet again, to 25 March 2022. Walker Morris’ Real Estate Litigation specialist David Manda explains the key features of the latest extension and offers practical advice on impacts for landlords and tenants.
Since 23 March 2020, as part of a package of emergency measures to protect the public and the economy in light of the Covid-19 pandemic, the UK government has imposed a moratorium on the forfeiture of commercial leases for non-payment of rent (section 82 Coronavirus Act 2020). As per the government’s announcement on 16 June, the moratorium has been extended until 25 March 2022 .
So what are the key features of the extension?
On 4 August 2021 the Government published a policy statement clarifying their announcement made on 16 June 2021 in relation to the extension of the forfeiture moratorium, the ring-fencing of COVID-19 commercial rent debts and the introduction of a binding arbitration process.
Details of this proposed legislation are yet to be published and the policy statement is light on any detail, but the government’s announcement makes the following key points:
The government’s announcements about this proposed legislation raise some questions:
Clearly, there is much still to be clarified. Walker Morris will monitor and report on developments. However, what is clear from the Government’s policy statement issued on 4 August 2021 is that it is hoped that the parties negotiate a resolution and that the arbitration process is seen as a matter of last resort.
Options open to landlords
In the meantime, various other remedies for lease arrears remain open to landlords.
For example, a landlord’s ability to sue tenants for unpaid rent and other lease sums which have accrued during the Coronavirus crisis via the courts remains unaffected. In addition, as there is some uncertainty over how the government’s proposed Covid arrears-related legislation will impact upon the law and procedure concerning landlord’s ability to sue for ‘ring-fenced’ arrears, there might now be a real practical impetus for landlords to issue and progress arrears claims – perhaps by summary judgment – in the window before the proposed legislation is enacted.
Landlords also still have the ability to pursue former tenants, former tenants’ guarantors, existing guarantors and/or subtenants in respect of arrears accrued during the pandemic. There are, however, various different legal and procedural hurdles which need to be overcome and/or notices which need to be served in each of these scenarios. Specialist advice should be obtained before any action at all is taken against any potential payees because the position and approach will differ depending upon a variety of factors (such as the date and terms of the existing lease, the terms of any guarantee, whether or not the right to pursue a sub-tenant has validly arisen, and so on).
There are no Covid-related restrictions on landlords drawing on rent deposits during the pandemic. (The Code of Practice, however, suggests that any drawing should be on the understanding that the landlord will not then require the deposit to be ‘topped up’ by the tenant until it is realistic and reasonable to do so.) In any event, before drawing on any rent deposit, a landlord or agent should check the terms of the particular rent deed and should take specialist legal advice – especially where there is any risk of tenant insolvency being on the cards. Insolvency action can impact upon a landlord’s ability to draw down on some rent deposits; and, equally, drawing upon rent deposits can sometimes affect (potentially adversely) a landlord’s position as a creditor in certain insolvency arrangements.
It currently remains open to a landlord to serve a statutory demand in respect of unpaid debts, including rent arrears. However, until after 30 September 2021 (or any future extended deadline), any such statutory demand will be of very limited effect as they cannot be used to form the basis of a winding up petition unless the landlord/creditor is able to demonstrate reasonable grounds for believing that the pandemic has not had an effect on the tenant’s ability to pay rent, or if the landlord/creditor is able to demonstrate that the tenant would have been unable to pay its debts regardless of the financial effect of Coronavirus. It is difficult to envisage this approach succeeding in any case other than where arrears pre-date the pandemic.
Coming back to consider the landlord’s ultimate remedy of forfeiture, Coronavirus Act 2020 moratorium does not apply in circumstances where a landlord is legally entitled to forfeit for breaches of tenant covenant other than non-payment of rent (for example, where a landlord can establish that a tenant is in breach of repair or alienation covenants or the tenant is insolvent).
In those circumstances, however, the possibility of waiver is still a live risk; plus there are additional requirements and considerations such as service of a notice pursuant to section 146 of the Law of Property Act 1925 to give the tenant a reasonable opportunity to remedy the breach, pursuing court proceedings for possession, and the risk of the tenant applying for (and the court awarding) relief from forfeiture.
Forfeiture of a commercial lease is fraught with legal and practical risks even in ordinary times. Forfeiture for breaches other than simply non-payment of rent, not to mention forfeiture post-Covid, is an even more complex undertaking and should only be embarked upon where the landlord has received the benefit of specialist advice.
Other key considerations
Quite apart from the legalities which have been considered so far, when the moratorium on commercial lease forfeiture is lifted, landlords and their agents will, of course, have to weigh up the perceived advantage of recovering possession with the financial risks associated with rates liability and the effect of void properties on wider comparables, as well as the usual legal and practical security concerns associated with voids.
Where a decision is taken that recovering possession is actually not preferable after all, landlords and their agents will need to be alive to the risk of inadvertent waiver, which will become a significant risk once again immediately after the forfeiture suspension is lifted.
Landlords and their agents should also continue to remain vigilant when it comes to attempts made by tenants to surrender leases by returning keys and/or abandoning premises, and not to accept those surrender attempts (even inadvertently) where the intention is actually to keep the lease alive.
Similarly, if/when any tenant purports to exercise a lease break, landlords and their agents should be aware of the many traps for the unwary that break options can entail and should seek specialist advice immediately upon receipt of any purported break, so that no lease termination attempt is accepted unless that is valid or desirable.
Finally, regardless of the means by which any commercial lease is brought to an end, there will in any lease termination/tenant departure scenario be the usual reinstatement and dilapidations issues to consider. A landlord’s remedies in respect of these wider exit-related concerns will be legally separate to the resolution of covid arrears disputes but, for all practical purposes, it would generally be unrealistic not to consider the position with the arrears and the state and occupation (or not) of premises ‘in the round’. To avoid the risk of action taken in relation to any one exit- or arrears- related issue adversely affecting or prejudicing another, landlords and their agents will be well-advised to speak to a Real Estate Litigation specialist to ensure that they received comprehensive and effective legal and practical advice.
 As well as the extension of the forfeiture moratorium, the restriction on the use of the Commercial Rent Arrears Recovery (CRAR) process by landlords has also been extended and will remain in place until 25 March 2022 and the presentation of winding up petitions will remain restricted to 30 September 2021.