What does the end of the lease forfeiture restrictions mean for commercial landlords?

IPA Insolvency Practitioner newsletter, October 2022

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Commercial landlords were able to take action against non-paying tenants through a variety of methods including implementing Commercial Rent Arrears Recovery (CRAR) through to forfeiting the lease entirely should payment still not be forthcoming. During the height of the Covid-19 pandemic in March 2020, however, landlords were stripped of these powers by way of emergency legislation brought in to protect tenants during this time of unprecedented business upheaval.

Aware that some commercial entities may have struggled to keep up with their contractual rental agreements during this time, restrictions were placed around a commercial landlord’s ability to recover rent arrears, including a ban on the serving of both statutory demands and winding up petitions against tenants. The new legislation meant landlords could not forfeit an existing lease due to non-payment of rent, unless they were able to demonstrate that the lease agreement was breached for reasons pre-dating or otherwise unconnected to the Covid-19 pandemic.

The legislation expired in March 2022, removing these temporary restrictions and once more giving landlords the ability to exercise their right to forfeiture. The emergency measures were replaced by the Commercial Rent (Coronavirus) Act 2022, giving landlords back the same options for recovering unpaid rent as they had prior to the pandemic, with one important caveat – any arrears which were incurred during the so-called “protected period” of 21 March-19 July 2021 (in England) by businesses operating in sectors where they were ordered to close due to the first national lockdown were initially exempt from usual recovery methods.

These arrears were known as ‘protected rent debt’ and had to be referred to a statutory arbitration process in order to allow for ‘proportionate resolution’ of the debt. Tenants and landlords were given a six month window from the start of the legislation to apply for arbitration; this expired on 24th September 2022 with tenants (and landlords) now having lost the right to claim relief under the Act unless already agreed.

So what options are available to landlords following the end of the arbitration scheme under the Commercial Rent (Coronavirus) Act 2022?

Following the expiration of the Act, arrears which are not already under an arbitration application can now be collected using the usual methods including CRAR, forfeiture and the presentation of a statutory demand and/or winding up petition in certain instances.

• CRAR – Commercial Rent Arrears Recovery is a statutory process giving landlords the power to seize goods in order to cover outstanding arrears should these total more than 7 days’ rent. A minimum of 7 days’ notice must be given to the tenant before enforcement action can begin. Following this period, CRAR can only be carried out using Certificated Enforcement Agents rather than any other type of bailiff or collection agent. CRAR is only an option for landlords if the leased property is used wholly for commercial purposes; if the property is residential, or is mixed use, collection using the CRAR  procedure is not possible. It must also be noted that utilizing CRAR will mean landlords surrendering their right to forfeiture.

• Lease forfeiture – Forfeiture is the process by which a landlord can terminate a lease early if the tenant is in breach of its covenants. In effect, this means peaceably entering the property and changing the locks, blocking the tenant from re-entering and therefore terminating the lease. Forfeiture can be an option in cases where rent has not been paid for a specific time (typically 14-21 days), however, this is a big step to take as forfeiting the lease will mean waiving the right to the agreed rent for the remainder of the lease period. If the landlord is confident of being able to re-let the property quickly, lease forfeiture is likely to be a much more attractive prospect than it would be for a landlord who may instead be left with a vacant property.
• Statutory demand/ Winding up petition – A formal written request for payment can be issued to the tenant by way of a statutory demand, so long as the tenant owes in excess of £750 (or more than £5,000 should be tenant be an individual as opposed to a company). Following the serving of a statutory demand, a tenant will have three weeks to clear their arrears or else come to an agreement for repayment with the landlord. If this is not done, the landlord can apply to the courts for a winding up petition; this will start the process of forcing the company into compulsory liquidation should the rent arrears remain unpaid.

This guest article is written by Jon Munnery, insolvency and restructuring expert at UK Liquidators, part of Begbies Traynor Group.