Government extends commercial possession moratorium

The Government has announced on 16 June 2021 in the House of Commons that the restrictions on commercial possession proceedings for rent arrears which have been in place since 25 March 2020 will be extended to 25 March 2022.

It is not yet clear, as the legislation has yet to be made publicly available, exactly what restrictions are intended to remain in place and if it is intended that the restrictions will remain in place as currently in force until 2022, or whether there will be any relaxation or caveats as has been seen in residential possession matters.

In his statement to the House of Commons, Chief Secretary to the Treasury Stephen Barclay stated that he believes the extension of the policy “strikes the right balance between protecting landlords and supporting those businesses that are most in need”. He also said, “We will introduce legislation in this parliamentary session to establish a backstop so that, where commercial negotiations between tenants and landlords are not successful, tenants and landlords go into binding arbitration” 

Based on this statement, the new legislation appears to be introducing further mechanisms for commercial landlords to recover rent arrears through binding arbitration. The statement provided does not appear to provide any details in respect of uncooperative tenants or tenants who could pay but refuse to.

Whilst further clarity is awaited in the coming days, we have set out below a brief reminder of the possession process for commercial landlords pre and post (or almost post) pandemic.

Common remedies previously used by commercial landlords

Prior to the pandemic, there were numerous options available for commercial landlords to take possession of their premises when a tenant was in breach of their lease, or to recover sums due under the lease. These included:

• Forfeiture of a lease, allowing the landlord to take back possession of the premises either by changing the locks or issuing court proceedings. This could take place where a tenant was in arrears with the rent due under their lease or if they had committed some other breach of their lease. This would be subject to the appropriate wording being contained in the lease and any necessary notices being served beforehand.
• Commercial Rent Arrears Recovery (also known as CRAR), allowing the landlord to use an enforcement agent to enter the premises and take control of the tenant’s goods which could then be sold with the proceeds being paid to the landlord. This would be subject to service of an advance notice and there being at least 7 days of ‘pure’ rent overdue.
• Service of a statutory demand, provided the rent arrears or other sums due under the lease exceeded £750 in relation to a company tenant, or £5000 in relation to an individual tenant. Such statutory demand could then be used as the basis for insolvency proceedings against the tenant.

This list is not exhaustive and our ‘Commercial rent arrears recovery guide’ provides further information in this respect, however, please note this was drafted before the Coronavirus Act 2020 took effect and may not be applicable at the present time.

Coronavirus Act 2020

The introduction of the Coronavirus Act 2020 in March 2020 provided a number of restrictions on the actions that commercial landlords could take. Briefly, these included the following:

• No action could be taken to forfeit a lease for non-payment of rent. However, the restrictions do not apply to forfeiture action for any other breach of the lease.
• A debt threshold was introduced in respect of CRAR. This meant that CRAR could only be utilised if there were 276 days of rent owing. The threshold was increased to 365 days from 25 December 2020, from 25 March 2021 to 23 June 2021 this was increased to 457 days and from 24 June 2021, this is set to increase again to 554 days. This means that in practice it will be difficult to use unless the tenant was already in arrears prior to the pandemic.
• Following the introduction of the Corporate Insolvency and Governance Act 2020, a statutory demand could not be used as the basis of a winding up petition against a company. In addition, a winding up petition cannot be issued unless the landlord believes that coronavirus has not had a financial impact on the company and/or that the company would have been insolvent without the impact of coronavirus

Current position

Following numerous extensions, the above restrictions were due to end on 30 June 2021.  This is now to be extended to 25 March 2022 (with the restrictions on statutory demands and winding up petitions currently extended to 30 September 2021), giving more uncertainty to commercial landlords who may have been unable to take action against tenants for 24 months.

The recent decision in Commerz Real Investmentgesellschaft mbh (CRI) v TFS Stores Limited (TFS) [2021] EWHC 863 (Ch) may have provided some comfort to landlords by confirming that the contractual relationship between the landlord and tenant is not affected by coronavirus to such an extent that the tenant is not liable for rent during the pandemic and that there is no obligation for the landlord to insure for loss of rent.

Unfortunately, this does not help landlords who are trapped with non-paying tenants, who may, in some circumstances, have simply chosen not to pay rather than can’t pay, safe in the knowledge that the landlord cannot take any action to evict them for some considerable time.

At present, the content and scope of the new legislation is unknown. However, Communities Secretary Robert Jenrick has stated that legislation will be introduced to ringfence rent arrears that have accrued when a business has had to close due to the pandemic. In addition, landlords will be expected to make allowances for the ringfenced rent arrears which are due to the pandemic and effectively share the financial burden with the tenant.

The Government guidance provides that, “The extension applies to all businesses, but the new measures that will be introduced by primary legislation will only cover those impacted by closures. This means that rent debt accumulated before March 2020 and after the date when relevant sector restrictions on trading are lifted, will be actionable by landlords as soon as the tenant protection measures are lifted. The arbitration process will be delivered by private arbitrators but in accordance with guidelines which we will set out in the legislation, and they will have to go through an approval process to prove their impartiality.”

Following a previous extension to the restrictions, the Government put out a call for evidence from commercial landlords and tenants in respect of the rent arrears and the response to this is expected to be published in due course.

The most recent announcement will be devastating for many commercial landlords whilst providing a lifeline for tenants, particularly in the hard-hit retail and hospitality industries. Once further clarity on the extended restrictions is available, this should provide commercial landlords with an understanding of the current position and what steps they can take to in light of the restrictions.