Commercial forfeiture moratorium extension: Features and impacts for landlords and tenants

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.

Key features of the extension

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 [1].

So what are the key features of the extension?

• The moratorium on forfeiture of commercial leases applies in respect of unpaid rent, which is defined as including any and all sums which a tenant is liable to pay under the lease.
• During the moratorium, rent (including other lease sums) and interest will continue to accrue.
• During the moratorium/forfeiture suspension period, no conduct by or on behalf of a landlord is to be regarded as waiving a right of re-entry or forfeiture for non-payment of rent, other than giving an express waiver in writing. Landlords can therefore continue to serve rent demands and otherwise liaise with the tenant in relation to matters connected with the lease without fear that such action could constitute a waiver of the right to forfeit for non-payment of rent.
• The moratorium is not limited to circumstances where the tenant has been unable to pay rent as a result of the pandemic – it applies across the board.

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 legislation to “ring-fence” outstanding unpaid rent and other sums accrued by commercial tenants who have been affected by Covid-19-related business closures and introducing a binding arbitration for dealing with such debt will be introduced in the current parliamentary session (i.e. by Spring 2022).
• The ring-fenced debt will be for the period from March 2020 until restrictions for their relevant sector were removed.
• Tenants who have not been affected should continue to pay.
• Tenants who have been affected should be paying sums due in full from when restrictions were lifted. Tenants should specifically apportion rent payments and make it clear to their landlords what period any payments relate to.
• When the legislation comes in, landlords will be able to forfeit for non-payment of rent that fell due prior to March 2020 or for a period after any relevant restrictions on opening were lifted.
• A more stringent and mandatory Code of Practice will be introduced setting out the principles the Government expect parties to adopt when negotiating. The new Code of Practice and the principles will be published prior to the arbitration scheme becoming effective in order that parties have time to negotiate.
• Landlords and tenants acting in good faith and in accordance with the principles in the Code of Practice will be expected to share the costs of any arbitration. Arbitrators may be empowered to order a party to pay all of the costs of the arbitration if they do not act in good faith or otherwise in accordance with the principles in the Code.

The government’s announcements about this proposed legislation raise some questions:

• How do the government’s proposals sit alongside recent court decisions which have confirmed that, as a matter of law, Covid-related rent arrears remain due and owing to the landlord in full?
• What will happen to those cases where landlords have already issued court proceedings for arrears? Will they be allowed to proceed or will they be stayed?  Will a court be required to adjudge in accordance with existing common law or will the proposed statute intervene?
• To which businesses will the legislation apply?
  • Will it only apply to those businesses/sectors that have been forced by law to remain in full lockdown during the entirety of the Covid crisis?
  • What about businesses that have been allowed to open, but trade has been significantly adversely affected?
  • What about businesses who were forced to invest in changes to premises and/or ways of working in order to survive?
  • What about businesses who were adversely affected by the pandemic but perhaps used savings or loans and/or income to nonetheless prioritise paying their rent? Will they now discover that they could and should have chosen not to do so?  If so, will any consequential commercial disadvantage be addressed?
• Will there be any business impact threshold that tenants are required to show?
• What financial/business information/evidence will a landlord and tenant need to provide to facilitate settlement negotiations and, in particular, any mandatory arbitration? How considerations about on-line sales or fluctuations in sales throughout the different periods will be factored in remains to be seen.
• How will the legislation work alongside landlord’s wider remedies? For example:
  • Will it affect a landlord’s ability to draw down on a rent deposit?
  • Will it affect a landlord’s ability to pursue former tenants, guarantors and/or sub-tenants?
  • How will the proposed arbitration process sit alongside any concurrent insolvency process (such as an administration or a CVA proposal); and how would a negotiated or an arbitrated ring-fenced arrears settlement be treated in any subsequent insolvency process – could it be further compromised?
  • When, pursuant to this legislation, a settlement agreement has been negotiated or imposed following arbitration, will rent and other lease sums necessarily conceded by the landlord be legally defined as ‘lost’, such that landlord’s might be able to successfully claim against loss of rent insurance policies?
• How will the arbitrations be resourced? Isn’t it likely that arbitration will be required in huge numbers of cases?  The government’s Code of Practice for the commercial property sector during the Covid-19 pandemic (“Code of Practice”) has been encouraging landlords and tenants to negotiate arrears settlements since its introduction in June 2020.  Where parties have not been able to reach settlement since then, is it likely that they will be able to do so at all or will mandatory arbitrations be required in all these cases? Will the revised Code of Practice change how these issues are dealt with between the parties?
• What will the proposed impartiality approval process involve?
• How will the costs of mandatory arbitrations be met?

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.

What practical advice arises?

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.

[1] 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.