On 23 April 2020, the Business Secretary, Alok Sharma, announced new measures to (1) temporarily ban the use of statutory demands and winding up orders where a company cannot pay their bills due to coronavirus and (2) prevent landlords using commercial rent arrears recovery (CRAR) unless 90 days or more of rent is unpaid.
The new measures will be in force until at least 30 June 2020, following emergency legislation introduced last month in the Coronavirus Act 2020, which provided a 3 month moratorium on landlords evicting commercial tenants unable to pay their rent due to Covid-19.
What is not so far clear is whether a landlord can serve a statutory demand and present a winding up petition for historic arrears, which pre-date coronavirus. In particular, what has not been addressed is what is meant by a tenant being unable to pay rent. If despite a grinding halt in footfall during lockdown, tenants still have the cash reserves to pay rent but are simply choosing not to, are they still classed as “unable” to pay? The wording of the legislation will be important here and further guidance may in due course be issued. In our view, it needs to be and quite quickly as many tenants are refusing to pay their rent.
With yet more options for landlords to recover rent arrears being taken off the table in order to protect tenants, landlords have been left asking “what about us”? The Property industry is a significant part of the economy but is likely to suffer irreparable harm by what is now happening. That will undoubtedly have long term adverse consequences for the UK economy.
The Government had previously signalled the need to ensure the correct balance is struck between landlords and tenants, in order that landlords are not penalised by disproportionate assistance being provided to tenants. In his press release of 23 March 2020 Alok Sharma said “As commercial tenants will still be liable for the rent after this period, the government is also actively monitoring the impact on commercial landlords’ cash flow and continues to be in dialogue with them”. Despite this, we are now at the point where the scales have well and truly tipped in favour of tenants. In circumstances where the landlord and tenant rhetoric during this pandemic has become considerably more tenant-centric the Government does need to consider, and urgently, the immense difficulties landlords are facing in these unprecedented times in order to re-address the balance.
In simple terms, commercial tenants have entered leases with their eyes wide open, under which they have obligations to meet, such as paying rent. These are clear contractual obligations. The payment of rent and interest for late payment and the contribution to service charge and insurance are lawfully due to the landlord. In turn, landlords are still expected to comply with their obligations to insure and maintain properties, while having their own staff to pay and lending commitments to meet. Also generally, an interruption to business is considered to be a tenant’s risk and one that is insurable even though many such policies have been worded so as not to cover the current crisis.
It is also fair to say that not all landlords are large institutions, pension funds or PLC’s. Many are small private companies, single investors or personal pension funds and many smaller landlords are going to really struggle to “weather the storm.” Whereas, some larger tenants are probably better placed to do so. On that basis it would seem the Government has not taken any account of proportionality.
Notwithstanding that some landlords and tenants are engaging in sensible commercial negotiations in order to overcome the current situation, there are many instances where tenants have been unwilling to engage with their landlords further than simply informing their landlord, when asked, that they will not be paying their rent.
While many tenants are undoubtedly struggling and genuinely require the Government’s assistance to stay afloat, there are also some tenants who could arguably be said to be exploiting the system in order to rid themselves of unprofitable premises or simply to be making use of the circumstances at the expense of their landlord.
With the March quarter day having come and gone, many landlords are now facing a potential 6 month period with no rental income. The knock on effect to landlords’ cash flows mean that many landlords are now struggling to service their lending commitments, often secured over their property, and are finding themselves in breach of their banking covenants. Some banks are proving to be more cooperative and proactive than others, leading to a “banking lottery” as to which landlords have better chances of weathering the Covid-19 storm.
There has been an emphasis on landlords needing to act sensibly. However, our view is that the current crisis requires active engagement on both sides from both landlords and tenants. The flat refusal by many tenants to pay any rent since the March quarter day has resulted in many landlords feeling compelled to take more drastic action in the form of serving a statutory demand. Landlords are also keenly aware that they will miss out unless they do this because they know their fellow landlords are doing the same. Just as those who did not hoard food and household goods at the very beginning of the Covid-19 pandemic, later found themselves forced to do so for fear of being left with nothing, landlords have also been compelled to take action to protect their position in eventually being repaid. Landlords have been aware that unless they serve a statutory demand, they could be at the bottom of the payment pile because tenants are more likely to pay a landlord who has served a statutory demand.
With this door to protecting their position now seemingly closed, it must be time for the Government to step in to redress the balance, for example by offering direct financial help to landlords to provide them with much needed assistance. Alternatively the Government should set out circumstances or grounds where landlords are actually able to pursue their tenants for unpaid rent. Failure to do so may lead to situations where locations are irreparably damaged due to lack of funds for investment.
Ultimately, more needs to be done to encourage the “sensible conversations” which the Government was aiming to achieve and which, in most cases, has been prevented by the restrictions on landlord remedies.
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