Government Intervention on "Aggressive" Commercial Landlords – New Laws Announced

In response to what has been described as “aggressive rent collection” in the face of the Covid-19 crisis, Business Secretary Alok Sharma has confirmed that legislation will shortly be implemented to:

• Temporarily void the use of statutory demands and winding up petitions; and
• Significantly limit the availability of the Commercial Rent Arrears Recovery regime.

Whilst the draft legislation is yet to be published or approved by Parliament, the measures will be included as part of the imminent Corporate Insolvency and Governance Bill and will apply “where a company cannot pay their bills due to coronavirus”, according to the press release announcing the changes.

Statutory Demands/Winding Up Petitions

At present, a landlord is entitled to serve a statutory demand or seek the winding up of any corporate tenant that owes more than £750 of undisputed debt. Rent, as a contractual sum, is rarely capable of being challenged and statutory demands are therefore an extremely popular means of commercial landlords distinguishing the “can’t pay” tenants from the “won’t pay” ones. The ban on this as a method of enforcement will deal an exceptionally heavy blow to landlords already suffering record declines in rent payments.

Interestingly, however, the notes accompanying the published guidance suggest that this might not operate as a blanket ban. They explain that any petition alleging that a company cannot pay its debts will be reviewed by the Court to determine the reason why; if the company’s inability to pay is the result of Covid-19, the petition will be rejected.

Of course, this throws up some significant practical issues. Rarely will a landlord’s demand presume to explain why the tenant has not paid – indeed, the landlord is unlikely to be privy to this information in any case. All the landlord will know (and all that will be stated in the demand or petition) is that payment has not been received. It is unclear how the Court will determine whether this is because of Covid-19, but there will likely be a presumption that any non-payment of commercial rents since the end of March will be on account of the pandemic. It might alternatively result in the tenant immediately writing to the court or stating in an application for an injunction that they are unable to pay due to Covid-19. Either way, there will quite possibly be numerous petitions rejected by the court’s initial review – and, even if that initial hurdle is passed, a delay in the petition being determined.

Commercial Rent Arrears Recovery (“CRAR”)

Separately, where tenants hold valuable stock, machinery or equipment at their premises, landlords have until now been able to make use of CRAR regime (formerly known as “distress”) to seize those goods and to sell them in discharge of the arrears.

Currently, CRAR is available where the tenant owes at least seven days’ rent. However, under the Government’s new proposals, this period is set to change more than tenfold, to 90 days. Not only will this introduce significant delays in enforcement, but savvy tenants are likely to make nominal payments to remain just below the threshold.

Limitations on new measures

Crucially, there is no mention in the guidance of these protections extending to tenants who operate in their personal capacity; the focus appears to be on companies, and protecting larger retailers and the employees who rely on their survival.

The new measures – once approved by Parliament – will be in place until at least 30 June, but will be capable of being extended alongside the existing ban on forfeiture introduced as part of the recent Coronavirus Act.

What options remain?

Although this announcement severely limits the options available to a commercial landlord, several do remain. For example:

• A landlord can still draw down on any rent deposit it holds. In fact, since the recent ban on forfeiture applies only to non-payment of rent, a landlord may be able to rely on any failure by the tenant to top-up the rent deposit as a separate breach for which the lease could still be forfeited.
• The new measures will likely apply only to tenants in the strict sense, meaning that guarantors (including those under an Authorised Guarantee Agreement, or “AGA”) can still be pursued by any of the usual means.
• A landlord remains free to issue a court money claim against the tenant. Whilst the usual methods of enforcing any judgment will be stymied by the measures announced yesterday, the landlord will at least benefit from interest on its judgment at the enhanced rate of 8%. Well-advised landlords may also make use of tactical offers such as those available under Part 36 of the Civil Procedure Rules, which provide significant financial advantages (such as indemnity costs; interest of up to 10% above base on the principal sum and on costs; and an additional award on the judgment sum) if the tenant fails to accept a realistic offer.

Further advice

We will provide a further update once the legislation is formally published and passed. In the meantime, if you are a commercial landlord, tenant or agent and would like to know more about how the new restrictions might impact your business, please get in touch with the authors, Liam Bell and Richard Evans, or your usual Memery Crystal contact.