Options for a commercial landlord if a tenant was in default before lockdown

The current Covid-19 crisis has prompted some commercial tenants to request temporary variations to their rent. We have previously highlighted some of the options open to both commercial landlords and tenants in reaching a negotiated agreement.

However, there are also situations where commercial landlords have tenants who were already defaulting for some reason prior to Covid-19 lockdown. What are landlords’ options in these circumstances?

We will look briefly, first of all, at the three principal types of direct action most often considered by landlords, namely recovering possession, court proceedings against a tenant and commercial rent arrears recovery (often referred to as ‘CRAR’).  We will then go on to look at some types of alternative recourse which are sometimes available to landlords against rent deposit accounts and pursuit of former tenants and guarantors of tenants.

Circumstances are being continuously reviewed and changes being announced by the Government on an ongoing basis, and so it is essential to take professional legal advice to ensure that you are up to date in order to make properly informed decisions.

Direct options

As is now well-known, the Coronavirus Act 2020 (the ‘CVA’), in force from 26 March 2020, was hurriedly introduced to address of a number of imminent structural threats to the economy.  In the context of business property, this included putting temporary stops and suspensions on actions which could be taken by investor landlords against tenants struggling with enforced closure due to the lock-down caused by COVID-19.

Everything depends on the so-called ‘Relevant Period’, which the CVA defines as the period up to and including 30 June 2020, but which is further extendable by Parliament.

Direct options are extremely limited because, for the duration of the Relevant Period, landlords cannot recover possession of business premises for non-payment of rent by court proceedings or through ‘re-entry forfeiture’ pursuant to a clause in their lease.  Even a landlord wishing to seek possession for default of a term of a lease other than non-payment of rent will run into the buffers.  But, after the Relevant Period ceases, the landlord’s rights are restored and action may be taken.  Backing up the CVA are temporary changes to the Court Rules which ensure that all actions for possession and enforcement of possession orders are suspended for the time being.

Depending on effective curtailment of the spread of the disease and the pace of the gradual re-opening of the national economy, these temporary provisions may be dropped, modified or extended at the end of the Relevant Period.  Due to continuing uncertainty about COVID-19 and the Prime Minister’s announcement on 10 May 2020 to stagger the re-opening of the economy, we think that it is likely that the Government will favour something other than a ‘cliff–edge’ solution.

Reports in the national press of some (in particular, residential) landlords seeking alternative means of recovering money from tenants prompted the Government to look at ensuring that ‘all of the bases’ were covered and led to further regulations which, from 25 April 2020, mandate that, during the Relevant Period, there must be an amount equivalent to 90 days' minimum net unpaid rent outstanding before CRAR may take place.  Subject to further changes to legislation, this may provide a solution for those landlords confronted with a legacy of default by a delinquent tenant and should be given careful consideration.

The introduction of further emergency measures, effective during the Relevant Period, to prevent enforcement by insolvency proceedings (e.g. presentation of winding-up proceedings and service of statutory demands) have also been announced by the Government and tenants can defend such action by adducing evidence that their financial predicament was caused by the onset of COVID-19 and its consequences.

Alternative options

Rent deposits

Sometimes a landlord will have recourse to a rent deposit account via a rent deposit deed (‘RDD’) which sits alongside and is designed to work in conjunction with the lease.  This could be a cost-effective solution for landlords but it is wise for them to seek tailored advice from legal professionals as to the means by which to do this.  The terms of the RDD should be thoroughly reviewed and there is often a notice procedure to comply with.  It will also be necessary to ensure that recourse to the RDD does not fall foul of the CVA and related restrictions in force at the relevant time.

Third Parties

A landlord may have the good fortune of recourse to a guarantor in the event of default by a tenant, but the terms of any guarantee will have to be carefully studied since such guarantees can afford rights to the guarantor which could interfere with the tenant’s possession and fall foul of the protections afforded by the CVA and connected measures.  Additionally, if legal proceedings are required, then delays could occur in relation to issuance, service and listing of proceedings due to COVID-19.

If a lease has been assigned, then it is now likely that it will be a ‘modern lease’ to which the provisions of the Landlord and Tenant (Covenants) Act 1995 apply and under which landlords would expect assignor tenants to guarantee the liabilities of their successor (called an authorised guarantee agreement, or ‘AGA’).  Sometimes, if the assignor tenant’s obligations under its lease are guaranteed, then that guarantor is also likely to have guaranteed the assignor tenant’s liabilities to the landlord under the AGA (a guarantee of an AGA, or ‘SAGA’).  In this type of scenario, the landlord is likely to have multiple options for recovery of unpaid rent and it is wise to seek legal professional advice on those options, especially since the enforceability of those types of agreement are sometimes contentious and depend on the drafting.  There has been a considerable amount of case law in recent years about such types of agreement.

Consensus options

Obviously, for tenants in difficulty due to COVID-19, my colleague Matt Hayward has outlined various options in his own blog posted on 5 May 2020, including entering into a payment agreement, offering a 'rent holiday' (deferment plan), temporary 'rent free' period, recalibrating the rent payment cycle, e.g. to monthly over quarterly payments, and/or in arrears instead of in advance.  There is also the possibility of varying leases and converting rent terms so as to create effective ‘turnover leases’ whereby a proportion of rent is linked to gross turnover of the occupying business, although these should only be considered where the landlord has a genuine deep knowledge and understanding of the business (or relevant part of the business) of the tenant.