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My tenant can’t pay or won’t pay. What are my options?

These are unprecedented times. For many businesses rent is one of the most, if not the most, significant outgoing. For leases with quarterly rent payments, there is a rent payment date this month. Some tenants will not have funds to make the payment. Others may ‘stockpile’ cash and choose not to make the payment. This guidance looks at the legal options, how the tenant’s status may impact the landlord and practical suggestions for moving forward. At the time of preparation information about government initiatives which may provide some assistance is scant.

Information

Step one is to garner as much information as you can now. Both down the chain from your tenants and up the chain from superior landlords or lenders.

  • Will your tenant be paying on the quarter day?
  • If not, when will the tenant be able to pay? Can this be supported by management accounts and future projections? Can your tenant offer you any security?
  • Will your landlord offer you a payment holiday or time to pay?
  • Will your lender offer you a payment holiday or time to pay?
  • Will your lender advance credit to allow you to pay your superior landlord?
  • Are you eligible for any government assistance?
  • Is your tenant eligible for government assistance? Does your tenant know about it? Has it applied?

Step two is to keep communicating. The situation is fluid. Financial positions can change very quickly. Government assistance criteria or eligibility may change. Keep the situation under review.

Government Assistance

Full details can be found here.

The government support includes:

  • 12-month business rates holiday for all retail, hospitality and leisure businesses – this only applies to occupied It will be automatically applied by local authorities and new bills sent out
  • £10,000 grant funding for all small businesses in receipt of small business rate relief– local authorities will contact those eligible
  • £25,000 grant funding for retail, hospitality and leisure rate businesses with property with a rateable value between £15,000 and £51,000 – local authorities will contact those eligible
  • Business interruption loans for SMEs– available now on application to participating lenders. Details can be found here
  • HMRC time to pay scheme– available on application. Contact the HMRC helpline on 0800 0159 559
  • VAT deferral – for all UK businesses from 20 March 2020 to 30 June 2020.Businesses will not need to make a VAT payment during this period. This is automatic. Liabilities accumulated during this period will need to be paid by the end of the 2020/21 tax year

This means that some tenants will have more available cash now than they may have anticipated. This is relevant when you are considering entering agreements or enforcement options. Whilst you may think that you should be sympathetic to your tenant, agreeing to a deferment now when they are likely to have cash may mean that other creditors are paid at the expense of the landlord. Each decision will, of course, need to be taken on its own merits.

Negotiation

Inevitably the downturn in the economy caused by Covid-19 will result in the failure of some businesses. Failed businesses will mean empty units. For many landlords having a tenant who is covering the outgoings of a unit is preferable to having no tenant at all.

Try to negotiate terms with your tenant. Consider some or a combination of:

  • time to pay agreements
  • rent holidays
  • rent reductions

Keep in mind that the relief available to your tenant and time payments to coincide with relief. Ensure any agreements reached are recorded in writing so all parties have certainty. Carefully consider how long an agreement should last. The situation is fluid. Ensure you have the capability to review or vary your agreement as the situation changes.

If you have a greater degree of certainty about what you will receive from your tenant, you will be in a better position to negotiate with and reach serviceable agreements with your superior landlord or lender.

Rent Deposit

If you have a rent deposit, consider:

  • the terms of the rent deposit deed
    • what do you have to do to allow you to withdraw funds?
    • what does the deed say about the tenant replenishing the deposit?
  • the timing of withdrawals
    • some rent deposits will revert to the tenant/liquidator if the tenant enters an insolvency procedure – check how the deposit is held – if there is a risk of the deposit reverting to the tenant, it may be better to claim it now;
    • if you think the tenant has access to funds now, but is reluctant to pay, it may be better to look at other options before using the rent deposit – although check what the deposit deed says about this.

Guarantors

Is there a guarantor? If there is, check the process which must be followed to allow a claim to be made against the guarantor and ensure you follow it.

Forfeiture

The Coronavirus Bill which is before Parliament prevents forfeiture whether by court order or re-entry before 30 June 2020.

Most commercial leases will contain a forfeiture clause allowing the landlord to recover possession of property if rent is not paid. Consider:

  • Do you want an empty unit?
  • Will you be able to re-let in a market that is likely to see a lot of vacant commercial property, particularly in retail, hospitality and leisure sectors? Is re-purposing the unit an option?
  • What happens to the tenant’s goods if you forfeit – will this involve cost to you?
  • What does the lease say about the process/timings?
  • What are the prospects of the tenant persuading a court to grant relief from forfeiture? It is possible that the government will step in and change the grounds for relief in view of the current situation, so this will need to be kept under review.

The right to forfeit is easily lost. If you are considering forfeiture as an option, discuss it with your property advisor at the earliest opportunity to ensure you do not inadvertently waive the right.

Commercial Rent Arrears Recovery (CRAR)

CRAR applies to all leases of commercial premises including tenancies at will and agricultural holdings, so long as the lease is in writing. It allows an agent to enter premises and recover goods which will be sold to re-pay the arrears. This course of action often prompts tenants to enter re-payment agreements. Consider:

  • Is the unit “commercial premises” as defined in the legislation?
  • Does the level of unpaid rent meet the CRAR threshold?
  • Will the tenant have goods which can be removed and sold to cover the arrears? Does the tenant own the valuable items, or are they leased or exempt?
  • What are the prospects of the tenant persuading a court to grant relief? It is possible that the government will step in and change the grounds for relief in view of the current situation, so this will need to be kept under review.

An authorised enforcement agent must be used, and the relevant procedure followed.

Court Proceedings

Unpaid rent can be claimed as a debt in court proceedings. Consider whether the range of enforcement options for enforcing a judgment give you a better opportunity for obtaining a payment from the tenant. Enforcement options for a judgment debt include:

  • Charging orders – useful if the tenant owns property, assets or shares. A charging order secures the debt.
  • Orders for sale – once a charging order has been obtained, if payment is not made, you may be able to obtain a court order to sell the property/asset/shares
  • Third party debt orders – sums due to the tenant from a third party can be diverted to you.

Insolvency Proceedings

Rent is usually a liquidated debt, due and payable immediately. If the tenant does not pay, you may be entitled to apply to wind up the tenant company or appoint an administrator. Consider carefully whether this course of action is likely to result in a payment to you.

My Tenant is in Liquidation

Upon liquidation a company ceases to trade and its assets are sold by a liquidator to repay creditors. A lease is usually considered to be an onerous contract. A liquidator can ‘disclaim’ it, i.e. bring it to an end. Consider:

  • Liaising with the liquidator to facilitate the handover of the unit
  • Submitting a proof of debt to the liquidator in respect of rent arrears
  • Whether you have any rights against guarantors
  • Whether the liquidator should be asked to investigate wrongdoing by the directors or third parties.

Bankruptcy is the equivalent of liquidation for individuals.

My Tenant Has Proposed a Voluntary Arrangement

A voluntary arrangement is where a company or individual reaches an agreement with creditors in respect of debts. It usually involves creditors accepting a reduced sum over a period of time. Creditors will be asked to vote on whether to accept or reject the proposal. If you are notified that your tenant intends to propose a voluntary arrangement, make sure you:

  • understand what is proposed and how it will affect you
  • follow the instructions given for voting. It is difficult to challenge a voluntary arrangement once is has been approved.

Voluntary arrangements may contain proposals which affect future rent and lease terms. It may propose:

  • reduced rent
  • a waiver of dilapidations liability, and/or
  • rights for the tenant to terminate.

If you are faced with a CVA proposal and want to object, consider acting in conjunction with other landlords who are affected.

My Tenant is in Administration

Administration allows a company to re-organise its affairs, recover debts and realise assets. An insolvency practitioner will be appointed to oversee the process (the Administrator). During the period of the administration creditors cannot take steps to recover debts. In most cases, the first a landlord will know about a tenant’s administration will be receipt of the Notice of Intention to Appoint. By then it will be too late for the landlord to take any of the enforcement steps outlined above.

The purpose of administration is one or more to the following:

  • Rescue the company as going concern
  • Achieve a better result for creditors than would be obtained on liquidation
  • Realise assets for the benefit of secured or preferential creditors

Administration is often the option for a company which finds itself in difficulty as a result of a specific event, e.g. a bad debt or an unfulfilled contract.

We expect to see a rise in the number of companies entering administration in the wake of Covid-19. In particular in the retail, hospitality and leisure sectors where companies were trading successfully but have found themselves in difficulty as a result of government advice to self-isolate.

What does this mean for landlords?

Rent is an expense of the administration. The administrator (not the tenant) will be obliged to pay rent if your premises is used during the administration process so the company can keep trading. You will therefore need to liaise with the administrator in this regard. Administration may in fact be beneficial to you given that the ongoing rent payments are an expense of the administration and payable in priority to other creditors. This is not the case for rent incurred prior to the appointment of administrators.

You may be approached by insolvency practitioners who are considering taking administration appointments. Rent is a significant outgoing and administrators will be reluctant to take on the personal liability to pay it. You may be asked to accept a reduced rent, or no rent at all for a period of time. You will therefore need to consider the issues set out at the start of this guidance – is it better to have a tenant (or administrator) covering outgoings than an empty unit. If the tenant is effectively going to be “mothballing” the business for several months you may be willing to defer your status as an expense creditor with a view to the tenant hopefully refinancing in due course to take the tenant out of administration paying all creditors in full.

The Property and Property Disputes teams at Debenhams Ottaway are available to assist you with questions or queries. Please contact a member of our team.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.