The Coronavirus Act 2020 – The moratorium on forfeiture explained
The 2020 Act prevents landlords from forfeiting the lease and enforcing a right of re-entry from 26 March until 30 June 2020, subject to extension at the discretion of the Secretary of State.
The 2020 Act currently restricts a landlord’s right to forfeit the lease for reasons of non-payment of rent only. Landlords can still bring forfeiture action for other material breaches of covenant, such as wilful damage or carrying out unauthorised alterations. There are however, some substantial legal hoops to jump through.
A landlord must serve a “Section 146 notice” (Law of Property Act 1925) on the tenant, which should include details of the breach to allow the tenant an opportunity to remedy this. The notice must specify a date by which the tenant must remedy the breach, which should be reasonable in the circumstances, given the nature of the breach. If the breach is not remedied within the time period specified in the notice, the landlord may apply to the court for an order authorising forfeiture of the lease.
At this stage, the tenant may apply for relief from forfeiture which, if granted, will restore their lease, as if this was never determined. A costs award may be made in favour of the landlord, but both sides could be significantly out of pocket by the end of the process. Careful consideration should therefore be given to the nature of the breach, and alternative remedies before seeking court intervention, particularly at a time when courts are suffering increased delays.
The government announced on 23 April that they will temporarily be banning the use of statutory demands and winding-up orders where a corporate tenant is unable to pay rent due to coronavirus. These measures will be included in the Corporate Insolvency and Governance Bill. Daniel Browne writes about the latest press release here.
A statutory demand is a written demand for payment served on the tenant in compliance with certain statutory requirements. If the tenant is a company, the amount owed by the tenant must exceed £750, or £5,000 if the tenant is an individual. If the tenant does not make payment within three weeks of service of the demand, then the landlord may issue a winding-up petition or bankruptcy petition to their commercial or residential tenant respectively.
The government is also preparing secondary legislation to delay a landlord’s ability to use Commercial Rent Arrears Recovery (CRAR) procedure to recover debts. It is likely this will only be able to be used where a commercial tenant owes at least 90 days of unpaid rent.
CRAR, introduced in 2014 to replace ‘Distress for Rent’ law, allows commercial landlords to use enforcement agents to take a tenant’s goods for sale in order to recover a debt. It also allows commercial landlords to recover rent direct from a sub-tenant on default of the tenant.
Details of how these measures will take effect are yet to be released, but it would follow the general principles of the moratorium under the Coronavirus Act 2020 if landlords were permitted to rely on these remedies immediately after the end of the ban, in respect of any debts accrued during the ban.
The remaining remedies for non-payment of rent that remain open to landlords include:
1. Rent deposits
If you are seeking to draw down on a rent deposit, be sure to review the terms of any rent deposit deed, or relevant clauses in the lease if the provisions are built in, and ensure the drawdown is effected in accordance with the relevant terms. The tenant will likely need to be notified of the drawdown, and will be required to replenish the rent deposit account within a specified period of time.
2. Guarantors and AGAs
You will have a contractual relationship with your tenant’s guarantor via the lease, or your previous tenant if an AGA was entered into on assignment of the lease. The 2020 Act does not prevent court action being taken against a guarantor who fails to fulfil their contractual obligations.
It is important to note that once the statutory moratorium period is over, landlords may immediately deal with any unpaid rent that has accrued during the moratorium in the usual way.
This is provided that landlords have not entered into any voluntary arrangements such as rent concessions or waivers documented by side letter, deed of variation, or surrender agreement. Landlords who intend to enter into such arrangements should consider whether consent is required from their lender.
Under the 2020 Act, landlords are not obliged to ‘accept’ the breach of non-payment of rent by the tenant. During the moratorium, landlords are in fact protected from inadvertently waiving their right to forfeit, for non-payment of rent only.
Prior to 26 March 2020 (and once the moratorium period concludes), continuing to demand rent and deal with the tenant, such as addressing applications for consent under the lease, will likely waive the landlord’s right to forfeit the lease. This remains the case during the moratorium if the breach is something other than non-payment of rent or other charges.
It is clear from the recent moves to ban statutory demands and delaying a landlord’s ability to use CRAR that the government is willing to intervene wherever necessary to safeguard as many businesses as possible. Landlords are in effect being encouraged to move away from litigious action such as forfeiture and debt recovery, in favour of commercial arrangements that allow for a period of flexible rent payments. However, landlords should bear in mind that there is no obligation to agree rent concessions or ‘accept’ the breach of non-payment of rent.
Emma Robinson is an Associate in the Real Estate team advising on a wide range of property transactions including commercial acquisitions and disposals, refinancing (including bridging finance) acting for lenders and borrowers, high value residential property matters, and commercial leases.
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