Commercial rent arrears and premises recovery – expert advice

Mark Gardner

The commercial property market has been impacted directly by the coronavirus pandemic, which has accelerated trends towards online shopping and working from home. Yet the market has been doubly hit by the government’s policy response to the pandemic, particularly its recent decision to extend the moratorium on Commercial Rent Arrears and premises recovery until March 2022.

With the prospect of meaningful enforcement kicked further down the road, it is little wonder that the UK’s commercial landlords have received as little as a fifth of the rent due on time.

Just 21% of the quarterly rent due was received on time in March 2021. Total arrears across the sector are now estimated to be in the region of £6bn.

The proposed extension is unwise since, if the parties to a lease cannot agree upon a resolution now, they are unlikely to able to agree early next year. The extension is only storing up pain for landlords, tenants and guarantors alike, particularly when analysts predict doomsday falls of up to 40% in the value of retail property. Yet instead of solutions being reached, commercial landlord and tenant disputes are now set to be left to fester until next year, with arrears rising all the time, and the prospect of a form of compulsory arbitration delaying matters even further.

It would be far better if an efficient bespoke legal mechanism were created now to rapidly resolve issues in commercial leases, even as the fallout from the pandemic continues to unfold. The government could now create a mechanism which involves minimal court fees and enables landlords issue 14-day notice of intention to forfeit which, should the tenant object, provide a streamlined response pack to help the tenant to respond quickly.

The Business and Property Court is full of experienced judges, capable of dealing with these types of disputes quickly, efficiently and pragmatically. The court could rapidly review the papers and either give permission to forfeit, or issue timetables setting out what further details are required, such as details of government assistance received, how it has been spent or details as to rent reductions proposed. The court could also invite proposals from each side as to how the matter could be resolved. A final two hour hearing with strict limits on submissions could then swiftly resolve the despite within just a few months, giving clarity to all parties.

Unfortunately, instead of adopting a pragmatic approach, the government is allowing the situation to fester and arrears to pile up, which is to nobody’s benefit. Indeed, the government’s inaction is only serving to exacerbate a likely wave of business related insolvencies and business property repossessions in mid-2022.

Landlords do have some options, even though their most potent avenues of redress have been closed off for now. They are free to attempt to recover the amounts due under a lease agreement as a debt in the Civil Courts.

Where a lease is guaranteed, they may also be able to recover against the guarantor and the longer this drags on the greater the potential liability of the guarantor who may not even be a part of the tenant business.

Where a tenant sublets all or part of the premises the landlord has the option to serve a notice requiring the subtenant to pay their rent directly to the superior landlord, up to the amount of the arrears due.

Another possible solution is to look at forfeiture for reasons other than rent arrears as these other reasons for forfeiture are not excluded from the moratorium.

One other avenue for recovery is the insolvency legislation. There are no restrictions as regards monies owed from individuals. There are some extra hurdles to overcome as regards companies – mostly surrounding whether the business has been adversely effected by COVID. These restrictions are currently timetabled to be relaxed at the end of September 2022 but we have heard that before!

Some landlords be able to recover in part from the tenant’s deposit, depending on the precise circumstances. The government’s code of practice suggests in such cases, landlords should only demand that deposits be topped up where this is “realistic and reasonable”.

Such narrow avenues of redress may perhaps be of use for some. Yet, for most commercial landlords and tenants, the government’s failure to now create a workable, fair mechanism to resolve issues early, means that the problems in the commercial property sector are likely to get far worse before they get better.

There is a significant risk that due to the yet further delays the pain will be unfairly shifted to commercial landlords, their lenders and thus their investors (which will include our pension funds) by unscrupulous tenants seeking to take advantage of the situation.

Mark Gardner is a specialist insolvency and corporate recovery lawyer at Excello Law.

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