In its initial package of support for businesses affected by restrictions imposed in response to the coronavirus, the Government restricted landlords' right to forfeit commercial leases for non-payment of rent. When rent payable on the March quarter day went unpaid, some landlords responded by taking other steps, such as serving statutory demands and commencing winding up proceedings against tenants.
The Government has recently announced new measures to restrict the use of statutory demands and winding up proceedings. With thoughts turning towards the easing of lockdown measures and in anticipation of landlords' next move, it has also brought into force measures restricting the use of Commercial Rent Arrears Recovery ("CRAR").
What is CRAR?
In summary, CRAR is a process allowing landlords to appoint registered agents to enter tenants' premises, take control of goods and sell them to pay off arrears. It replaced the old remedy of distress. CRAR can only be used in relation to written leases of commercial premises. It has not seen great uptake since its introduction in 2014. CRAR has equally not been especially popular since the outbreak of coronavirus: it requires the registered agent to physically attend the premises and is usually only exercised when the tenant's business is open for trade. In the absence of forfeiture or serving statutory demands, though, it is one of the obvious next steps for landlords, particularly once the lockdown is lifted.
What has changed?
The most significant change is to the minimum arrears necessary before CRAR can be initiated. Prior to the new restrictions, landlords could initiate CRAR where the tenant was in arrears equalling at least seven days' rent (i.e. principal rent, not service charges or other sums defined as rent under the lease). That has temporarily been increased to 90 days' rent. For quarterly tenancies, with the March quarter being 91 days long, that means landlords can still initiate CRAR immediately if the March quarter rent is unpaid. However, so long as the tenant brings the arrears below the minimum threshold before the landlord takes control of their goods, the landlord cannot take further action. That means that CRAR can be rendered toothless for most commercial tenants by payment of a relatively small sum, at least until arrears significantly in excess of the minimum threshold accrue. That may push the problem a few months down the line, by which time the lockdown may be relaxed. There is therefore a risk of CRAR coming back into play just when tenants are trying to get back on their feet.
Enforcing CRAR at residential premises and on roads has also been temporarily restricted. Initiating CRAR usually waives the landlord's right to forfeit. During the lockdown, that is unlikely to apply (but landlords may still take a cautious approach).
What if CRAR had already been initiated?
The restrictions only affect new CRAR action started after 24 April 2020 onwards. Where the notice of enforcement had already been served up to and including 24 April 2020, the minimum arrears required remain at the old level, i.e. seven days' principal rent.
CRAR action must be completed within one year of the notice of enforcement, unless extended by court order. Where this period came to an end on or after 26 March 2020, there is an automatic 12-month extension to the enforcement period.
So where does that leave landlords and tenants?
Landlords can, for now, still bring a debt claim for any arrears, but that is likely to be a much slower process than some of the other options that were previously available to them. It may also cost them a lot more and therefore risk simply adding to their losses. It is however important to keep in mind that tenants' obligation to pay rent has not been suspended. Whilst landlords' options are being limited now, much of the changes being introduced are likely to be temporary and therefore some landlords, if they can afford to, will decide to bide their time and then pursue arrears when the restrictions have been lifted or there is simply more clarity as to the best approach to take with regards to recovering arrears.
Tenants have been given what many of them will consider welcome breathing space, but they will need to be careful not to store up even bigger problems for later in the year, when cash flow pressures could be even more acute than they are now.
Echoing the Government's guidance to landlords and tenants throughout this public health crisis, both should aim for a constructive dialogue and try to arrive at a solution that both can live with. It is clear that the Government is loath to allow what will hopefully be a temporary crisis to destroy landlord and tenant relationships, which are a key pillar of economic life. The high street, already knocked to the canvas by changing consumer spending patterns and high business rates, could be out for the count if landlords and tenants are not able to find a path through the current crisis.