Concerns have been raised that some businesses may not be able to repay the outstanding rent as the difficult economic situation has left their business in a state that will take years to recover, if at all.
By Lucy Nelson, Litigation Associate
Commercial tenants have racked up pandemic-related rent arrears estimated up to £7 billion, according to the British Property Federation.
The government introduced a ban on business property evictions in April 2020 to help struggling companies through the pandemic, which has been extended several times during the course of COVID-19 lockdowns and is now set to be in place until the end of June 2021.
The ban covers all commercial property including offices and warehouses, but the majority of unpaid rent is from the retail and hospitality sectors.
Many landlords and tenants have agreed on rent holidays, deferrals and price reductions during the pandemic, but concerns have been raised that some businesses may not be able to repay the outstanding rent as the difficult economic situation has left their business in a state that will take years to recover, if at all.
With lockdown restrictions easing and the end of the eviction ban drawing ever closer, we answer some of your questions around commercial property rent arrears and payments.
Q: I agreed on a rent reduction during lockdown, but my tenant’s business has been doing well online, can I ask for back-payment for the full amount?
A: This depends on how and what you agreed in relation to the rent reduction and what the terms of that agreement were in relation to the original lease.
Dependant on the terms of the original lease and how you incorporated the agreed reduction, you will usually be due the full amount of rent agreed under the original lease, so in effect you will have delayed payment for the full amount to a later date , often with interest if payments have been delayed.
However, if you agreed to a rent reduction regardless of circumstance, then it should not matter that your tenant’s business has done well during lockdown. It is likely that there will have been an end date on the rent reduction, so the tenant should begin paying the full rent from this date.
Q: Am I within my rights to evict if owed rent isn’t paid back by 7th July?
A: The Government introduced measures to protect commercial tenants during the pandemic, including a ban on evictions. This ban has been extended several times over the past year but is due to finish on 30th June 2021.
There weren’t any measures that stated tenants didn’t have to pay their rent, this was purely at the landlord’s discretion. So, if you haven’t agreed any rent reductions, payment plans or holidays with your tenant and they haven’t been paying their rent then they are in breach of their lease, and you can evict after the ban has lifted.
There are also other legal proceedings you could decide to take, which may be more beneficial for both parties if your tenant isn’t able to pay their rent, including withdrawing funds from their rent deposit or actioning the Commercial Rent Arrears Recovery (CRAR) procedure which enables the landlord to ‘seize’ goods on site and sell them in order to recover an equivalent value to your unpaid rent.
Q: I agreed a rent deferral with my tenant, but they’re not sure if or when they’ll be able to make the full payment, what should I do?
A: Legally your tenant is still obliged to pay everything that is owed during and after lockdown. They may even have to pay interest on any outstanding payments, depending on the contract.
Communication is key to resolving this. You might be willing to set up a payment plan or continue deferred payments. This is completely at your discretion though, which is why it’s important to communicate.
Above all else, it is important you get any agreed arrangements in writing, so you have evidence of what has been agreed.
If your tenant is thinking they might have to close their business completely, your tenant has alternative ways of getting out of the lease obligations including actioning the break clause, assigning the lease or agreeing a surrender.
Q: Am I within my rights to sue if my tenant hasn’t paid their commercial rent?
A: The lease is a contract so failing to pay the rent will constitute a breach of contract, and therefore you are within your rights to start legal action.
You can sue you for your losses, make them insolvent or use Commercial Rent Arrears Recovery (CRAR) as a way of seizing goods to the sum of the debt due.
However, the Government did introduce some methods to help protect tenants during the economic difficulties of the pandemic which means landlords cannot issue Statutory Demands until after 30th June 2021, and CRAR can only be used if the rent is overdue by 457 days between 25th March 2021 and 23rd June 2021, and 554 days rent between 24th and 30th June 2021.
If the rent still remains unpaid after 30th June 2021, these protections are no longer in place for tenants and landlords can issue a Statutory Demand and begin other legal proceedings to claim their unpaid rent back.
It’s important to communicate with your tenant and see if you can come to an agreement, whether that’s setting up a payment plan or using their rent deposit. Formal legal action should be the last resort, communication and resolution should be your first step.
Q. My hospitality tenant hasn’t paid their rent since lockdown began, I have used their rent deposit but it hasn’t covered everything, can I begin Commercial Rent Arrears Recovery (CRAR) proceedings?
A: CRAR is used to take control of a tenant’s goods so they can be sold in order to recover the equivalent value of any rent arrears.
As part of the government’s protection measures to help struggling businesses during the pandemic, they placed some restrictions on the use of CRAR which are in place until 30th June 2021.
Previously tenants only had to have 7 days of outstanding rent before you could begin proceedings, but this has been significantly extended and now cannot be used unless the tenant has rent arrears of at least:
- 189 days rent on or after 24 June 2020 (but before 29 September 2020);
- 276 days rent on or after 29 September 2020 (but before 25 December 2020);
- 366 days rent on or after 25 December 2020 (but before 25 March 2021);
- 457 days rent on or after 25 March 2021 (but before 24 June 2021); or
- 554 days rent on or after 24 June 2021 (until 30 June 2021).
Q. My tenant has indicated they won’t be able to make up their rent arrears and we haven’t been able to come to a mutual solution, can I issue a winding-up petition?
A: Due to the current Government restrictions in place aimed to help protect businesses during the pandemic you cannot present a winding-up petition against a company unless you have reasonable grounds for believing COVID-19 has not had a financial effect on the company or the debt issues would have arisen anyway.
Therefore, it is best to look at the alternatives if you’ve not been able to come to a mutual solution. Consider using their rent deposit to make up any outstanding payments or contacting their guarantor if there was one on the lease. You could also look at the Commercial Rent Arrears Recovery (CRAR) method, however there are some timing restrictions on this due to the pandemic.
If you aren’t sure of the best course of action to take, we can discuss the options available and help you come to a mutual solution with your tenant.
If you’re a landlord or tenant concerned about your commercial property lease, you can contact me directly on Lucy.Nelson@primaslaw.co.uk.