The government came to the aid of commercial tenants with the Coronavirus Act 2020, to try to protect their interests in a time of crisis.
However, the measures included apply from 26 March 2020 which have now been extended 31 March 2021. Unless there is a further extension many landlords will be considering their position where tenants are in serious arrears with rent and other payments and one of their options is forfeiture.
This article refers to English law. It is not a definitive interpretation of the law. Every case is different, rules change over time and only a court can decide -always seek expert advice before taking action or not.
Th legislation in force until march 31st had the following effect:
- It provides a moratorium on forfeiture of commercial leases for non-payment of rent, rent being defined in the Act as any amount due under the lease which includes service charges, insurance payments, utilities etc
- The moratorium is a delaying mechanism, it does not wipe off the debt, but as we all know, as a debt builds it gets harder to pay off, especially as earnings are likely to be adversely affected for some time
- The Act prevents the landlord from using non-payment as a ground of objection by a under the Landlord and Tenant Act 1954
- Once the legislation period ends a landlord will be able to claim forfeiture for overdue payments and for any future unpaid debts.
Whilst the moratorium is providing a much needed breathing space for some tenants, helping them to manage their cash-flow, others will be in the position were their business is beyond recovery – their landlords will have some hard decisions to make.
During the moratorium period, in addition to the moratorium on forfeiture, the Act also prevents landlords from using Commercial Rent Arrears Recovery (CRAR), but this restriction to will end once the moratorium period ends.
What is Forfeiture?
When a business tenant is in rent arrears or is in serious breach of the lease terms, then the commercial landlord will in most cases have the right to forfeit – the right to summarily end the tenancy. The landlord must however comply with section 146(1) of the Law of Property Act 1925.
There is no automatic right to forfeit a lease unless the lease contains specific provisions by way of a clause setting out the grounds on which the landlord may forfeit. The landlord’s actions must indicate that he intends to end the lease, so actions to the contrary, like accepting rent, will remove the right to forfeit.
There are two main methods of doing this: (1) by peaceable re-entry to the premises or (2) by issuing court proceedings for possession.
Before taking the drastic step of ending a commercial lease the landlord should carefully consider its long term strategy and other factors involved:
– What is the length of lease remaining?
– What is the long-term viability of the business?
– If the business is in financial difficulties, what are the chances of recovery?
– Can the tenant sub-let the whole or part to ease his difficulties?
– If the business is a limited company, are there any guarantors?
– Can the business assign the lease?
– What is the market situation regarding re-letting – is there alternative demand?
– A very important consideration is that the landlord will become liable for full business rates soon after a commercial property comes vacant, so commercial landlords face a double whammy – not only do they lose the full rental income, they pay out full business rates when vacant.
– A vacant property means that insurance premiums increase, often it will double the cost and the tenant is no longer paying the insurance bill which makes it a new cost for the landlord.
– Utilities bills don’t stop coming when the property is vacant, there are standing charges, so again it’s a new cost for the landlord, and there’s a lot of working involved in administering all of this.
– The landlord may need to supply on-site security at considerable cost.
Landlords should proceed with caution if they are to contemplate this drastic step. They will be in danger of breaking the law if they use force or violence to possess the property. Entering when the property is empty and changing the locks is still legal, though this is under legal review.
A far safer method, if you are to use re-entry, is to employ private certificated bailiffs to do this for you. They will have locksmiths on hand and will post the correct notices on the premises, giving the tenant their statutory rights to collect any goods and possession left in the property, at some arranged time.
Using bailiffs avoids the possibility of the landlord being accused of interfering with or taking the tenants possessions.
– Proceedings for Possession – Business Lease
– Possession proceedings may be commenced by applying to the High Court or in the local County Court nearest to premises. From the landlord’s viewpoint – – –
– Possession Proceedings is the safest option to avoid being accused of breaking the law.
The Court will set a hearing date when it issues the claim.
Where the tenant wishes to defend the claim for possession a defence should be filed with the court within 14 days.
Relief from Forfeiture
Tenants have a legal right of appeal to the court for relief from forfeiture and may be able to resume their occupation on payment of any rent and service charge arrears, remedy other breaches of covenant and pay locksmiths’ and bailiffs’ charges. The court has wide discretion to grant relief having considered all the circumstances.
If a possession order is granted the tenant will normally be allowed 28 days to vacate the premises. The tenant will have the right to apply for relief from forfeiture as outlined above, subject to meeting conditions imposed by the court, which will involve remedying breaches of the lease and paying all arrears and the landlord’s cost.