This note has been updated as at 2 October 2020.
There are relatively few options open to rural landlords for dealing with tenants of residential and commercial property who are struggling to pay their rent.
The government’s emergency legislation, passed on 25 March, provided that from 26 March to 30 September, notice periods to terminate certain residential tenancies were extended to three months. From 29 August, the notice period has been extended to six months, until at least the end of March 2021 (with certain exceptions where notice periods have reverted to normal, for example where there are over six months’ rent arrears). This applies to assured and assured shorthold tenancies, as well as Rent Act 1977 protected and statutory tenancies. There have been no changes to notice periods for common law tenancies or Rent (Agriculture) Act 1976 tenancies.
The previous suspension of all housing possession action in the courts (or about to enter the court system) ended on 20 September. However, landlords will need to serve a "re-activation notice" for any proceedings initiated before 3 August and, for all new proceedings, explain their tenant’s circumstances in relation to coronavirus. From 29 August, once a termination notice is served, landlords will need to give six months’ notice of their desire to claim possession through the courts.
Short of navigating a rather overwhelmed court system, a landlord’s options are likely to be limited to the following:
1. Rent deposits: Where a tenant has paid a deposit at the start of the tenancy, the landlord might be able to draw on this to cover the unpaid rent, if the terms of the agreement allow for this. Exactly how this is handled will depend on the terms, and where the deposit is protected by a tenancy deposit scheme, the rules of the scheme could mean this is not a straightforward option. In addition, any communication with the tenant will need to preserve the landlord’s rights and ensure the tenant is obliged to top up the deposit within a certain time.
2. Guarantors: Some tenancies contain guarantee provisions stating that the guarantor is liable for the rent if the tenant does not pay. If this is the case, the landlord could pursue a guarantor, although certain prior notices may need to be served.
3. Rent concessions: Landlords may offer temporary arrangements, such as reduced payments, deferment of payments or rent ‘holidays’ (full rent-free periods). An arrangement should be recorded in a carefully worded letter to protect the landlord’s rights, and to avoid accidentally releasing any guarantor from its liabilities.
4. Bankruptcy: For non-payment of rent or other charges, a landlord may be able to serve a statutory demand requiring payment in 21 days, failing which an individual tenant could be made bankrupt. This is unlikely to be a useful method to recover the unpaid rent if the tenant is genuinely struggling financially, and there would be reputational risk in the current climate. However, landlords might be aware of tenants who are well able to pay rent and could be taking advantage of the situation. Bankruptcy proceedings are still possible, albeit with likely delays and potential online hearings, so this option remains open for those few tenants who are wilfully withholding rent.
Nevertheless, a collaborative approach is likely to be preferable on the whole, to maintain good public relations and foster tenant loyalty.
The situation is slightly different in relation to any commercial units on an estate, because forfeiture, seizing goods and insolvency proceedings for companies have all been restricted.
Under the emergency legislation, no forfeiture or re-entry clause in a business lease may be enforced, for non-payment of rent, between 26 March and 31 December 2020 (the period may be extended by further legislation). Existing possession orders may be postponed. Any right of re-entry will not be lost during this period, unless the landlord expressly states as much in writing – so any concession letter to the tenant should take care on the point. Otherwise, the rights and obligations in any given lease generally remain in force (subject to any government requirements, such as for certain premises to close).
The seizure of goods to pay the debt (known as Commercial Rent Arrears Recovery) is restricted by legislation which came into force on 25 April and was amended in June and again in September. The legislation now states that 276 days’ rent must be due and unpaid, or 366 days’ rent where the notice of enforcement is given on or after 25 December 2020 (increased from seven days’ rent in normal times). More likely to discourage landlords, though, are the practical difficulties of seizing goods and selling them at public auction (as CRAR requires).
In addition, the Corporate Insolvency and Governance Act 2020 (the Act) which came into force on 26 June and has recently been amended, invalidates any statutory demand served between 1 March and 31 December. During the same period, winding up petitions (the equivalent of bankruptcy for companies) can only be presented if the landlord can prove reasonable grounds for believing that the business has not been affected financially by coronavirus, or that the relevant facts would have been the same even without coronavirus. The Act also introduces the ability for companies to apply for an extendable statutory moratorium of 20 business days, which would prevent a landlord taking any legal action against them – including debt claims and potentially, in some cases, drawing on a rent deposit (depending on the terms of the deposit).
The realistic options for a landlord are therefore rent deposits (subject to checking their terms), pursuing guarantors or other third parties like sub-tenants and previous tenants, and rent concessions.
Some estates may feel they can take a more robust approach with commercial tenants, especially where there is a strong sense that the tenant is in fact capable of paying the rent and the reputational risk is lower. However, taking aggressive action may lead to empty properties, reducing income and leaving the landlord with the burden (both practically and financially) of running premises. In addition, the government has published a Code of Practice for commercial property, supported by the ALA and CLA among others, which encourages landlords and tenants to work together. A collaborative approach with valued tenants in genuine difficulty is likely to bring opportunities to strike constructive deals, such as securing a lease extension in return for a rent concession, and may strengthen the landlord/tenant relationship to your mutual benefit in the long term.
A link to our COVID-19 web page is here where you can find our advice notes that are updated on a daily basis.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2020