Landlord and tenant debt recovery during the pandemic
Currently, as a result of the Coronavirus Act 2020 (“the Act”), there are certain restrictions on commercial landlords in order to protect their tenants. However, these restrictions do not mean that your tenants are not obliged to pay the rent and you cannot pursue debt recovery proceedings as has been confirmed in recent case law.
Further, whilst the Code of Practice for commercial property relationships during the COVID-19 pandemic does suggest a collaborative approach to landlord-tenant relationships and rents during and as a result of the pandemic (as set out in this earlier blog), it is not mandatory nor does it affect the contractual relationship between landlord and tenant.
This was one of the issues in the recent case of Commerz Real Investmentgesellschaft mbh v TFS Stores Limited
Here, the tenant had failed to pay rent and service charges and had been forced to close their business for a number of months in line with the Coronavirus Regulations. The landlord issued Court proceedings for the recovery of the sums due and owing, which the tenant defended, arguing that (1) the landlord had issued their claim prematurely and therefore non-cooperatively, in defiance of the Code of Practice; (2) the claim was a means of circumventing the moratorium on forfeiture, winding up, and CRAR measures currently in place, and thus unlawful; (3) the landlord was obliged to insure against a notifiable disease for loss of rent and should recover the sums from that; and (4) the rent cesser provisions in the lease applied to the Covid-19 pandemic, and that the pandemic qualified as a suspending event for these purposes.
The landlord applied for summary judgment and was successful.
The Judge found that (1) the Code did not affect the legal relationship between tenants and landlords, and in any event the landlord had been co-operative throughout the moratorium period; (2) although the Government had placed restrictions on some remedies available to landlords for non-payment of rent, this did not prevent them from bringing a claim in debt - their entitlement to payment remained unaffected; (3) the lease provisions stipulated that the landlord’s obligation to insure was limited to the named risks, and that they were under no further obligation to insure against any other risks; and (4) in this instance the rent cesser provisions only applied where there was physical damage to the premises, and therefore did not apply to the circumstances brought about by Covid-19.
What does this mean for landlord and tenants?
In practice this case means that, the moratorium is just that - a period in which enforcement measures are difficult to enact. The existing relationship and obligations between landlord and tenant are not fundamentally altered by this period, and if your tenant is in a position to pay, they are not automatically exempted from doing so by the unusual circumstances in which we all find ourselves.
As a commercial landlord, unless there are relevant rent cesser and insurance provisions contained within the lease which may affect your position in relation to rent arrears, there is nothing to stop you from suing for them. However, it is important to remember that both parties’ conduct and spirit of co-operation will be taken into account by a Court in accordance with the pre-action protocol rules and the overriding objective.
It is also worth noting that, while this case can only be seen as good news for landlords, there are still restrictions in place that may make it difficult to enforce until the moratorium ends at the end of June or the restrictions are lifted further.
It is also worth noting that whilst the Act stipulates that landlords may not forfeit a lease for non-payment of rent during the moratorium period (which is currently due to finish on 30 June 2021), this also does not mean that, as a landlord, you cannot forfeit at all as you may have other grounds. It also does not mean that you waive your right to forfeit in the future. You are advised to get legal advice before communicating with your tenant, however, as you may be advised to cease all communications or particularly communications with regards to the arrears.
In an update to the above, it was announced on 18 June that the CRAR and forfeiture moratorium is being extended to the 25 March 2022 with legislation being put before Parliament shortly with a view to creating a binding arbitration mechanism to seek to bring an end to impasses reached in negotiations between commercial landlords and tenants regarding lease obligations due to Covid. This extension is welcomed news for the hospitality sector as an example, but will not be by commercial landlords. However, tenants remain encouraged to pay their rent in accordance with the terms of their lease, and the moratorium does not stop the obligation to pay rent. There are other possible alternatives to forfeiture.