COVID-19: Landlords – commercial rent arrears and possible options towards recovery

Many tenants and landlords have adapted to the COVID-19 crisis and worked together to reach an agreement concerning the rent falling due since the lockdown.

Landlords will be familiar by now with the fact that they cannot forfeit leases for non-payment of rent until at least the end of June.

Landlords will also be familiar with the Government’s announcement that they will not be allowed to serve statutory demands under the Insolvency Act or issue Winding Up Petitions, although this announcement has yet to be enacted in statute.

What alternatives are there if the tenant in defiance of Government guidelines is refusing to come to a reasonable compromise?

Guarantor

If there is a guarantor or surety of the tenant’s covenants under the lease, that guarantor is usually directly liable to the landlord. They are not absolved by the Coronavirus Act from liability. Check the guarantee provisions for how to make a claim against the guarantor.

Rent Deposit Deed

Using funds held in a rent deposit can assist landlords with immediate cashflow issues. The rent deposit deed will set out the process to be followed to withdraw funds. Most rent deposit deeds allow the landlord to give notice to the tenant to replenish funds used. It doesn’t solve the problem of non-payment, but it does help with cashflow.

Are any former tenants liable to pay the rent

Leases prior to 1 January 1996

Where the lease on which the arrears have accrued was created prior to 1 January 1996, unless there has been an express agreement to the contrary, a landlord can pursue a previous tenant or tenants under the same lease. In the case of a previous tenant who was not the original tenant, that tenant must have entered into a direct covenant with the landlord to observe the tenant’s covenants under the lease.

Leases granted on or after 1 January 1996  

Landlords can pursue former tenants or former guarantors if they entered into an Authorised Guarantee Agreement (AGA) at the time of assignment. If so, that former tenant or former guarantor will remain liable unless the terms of the lease have been changed without their agreement or unless they have been previously released by agreement. In order to trigger liability, the landlord must serve notice on the former tenant or former guarantor under Section 17 of the Landlord and Tenant Covenants Act 1995 within 6 months of the rent or other monies under the lease becoming due.

Landlords should therefore check their leases and where there has been an assignment, whether there is any AGA.  If the lease was created prior to 1 January 1996, are the former tenants or former guarantors, traceable, in which event, they may be liable.