New legislation that stops forfeiture
Most standard commercial leases include a right of re-entry which entitles the landlord to forfeit the lease in the event of a default by the tenant, including non payment of rent. Typically, the landlord will be allowed to re-enter the property if the rent is unpaid for 14 or 21 days after it falls due. A commercial lease can be forfeited without a notice by simply changing the locks and taking possession of the property, or by issuing court proceedings.
Due to current pandemic of COVID 19, Parliament took steps to temporarily prevent forfeiture action by landlords as part of the Coronavirus Act 2020. Section 82 of that Act imposes a temporary moratorium on a landlord’s right to forfeit a commercial lease based on rent arrears. The Act says that “a right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period.” The relevant period is the period beginning on the day after the Act was passed (26 March 2020) and ending with 30 June 2020, or longer if the government deems necessary.
But – the new law does not stop aggressive action for non payment
Whilst the new moratorium on lease forfeiture is now in place, refusing to pay the lease rents does not prevent landlords from taking other action against a tenant for non payment. The Act does not, however, prevent landlords from serving statutory demands requesting payment within 21 days, under the insolvency legislation, issuing Court proceedings to obtain judgment for the arrears, or taking steps to take control of a tenant’s goods under the Commercial Rent Arrears Recovery Regime (known by most as ‘CRAR’). If payment is not made, the landlord is also entitled to apply to bankrupt the tenant (if an individual tenant and a statutory demand has been served) or issue a winding-up petition against company tenants (where no statutory demand is needed first).
Some landlords are now issuing statutory demands and winding-up petitions
Although some landlords agreed to engage in constructive discussions, it has recently been reported by the BBC that “a worrying number of landlords have decided to pursue statutory demand notices or winding up orders" against commercial tenants.
The chief executive of UKActive, Huw Edwards, said that urgent action is required to safeguard commercial tenants. It was pointed out that nearly 3,000 gyms are at risk of permanent closure, and 100,000 jobs are at stake. In one reported case, David Lloyd Leisure asked a landlord for a waiver of rent due to COVID 19, but the landlord replied by threatening legal action. A number of other landlords have apparently responded in a similar way, by either threatening proceedings, requesting that tenant should borrow under the government loan scheme or take out personal loans. Pubs, restaurants and non-essential shops are also at risk, amid fears that they will not be able to reopen after the outbreak due to cash shortfall.
Impact of the proposed new moratorium promised by government
Under the plans announced by the UK Business Secretary on 28 March 2020 the government will be introducing a moratorium for companies giving them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure.
This legislation is urgently needed by commercial tenants.