What steps can landlords take in the event of tenant default and preserve any rights?

The government passed the Coronavirus Act 2020 (2020 Act) on 25 March 2020 and you can see our article on this here. 

Section 82 of the 2020 Act imposes a moratorium on landlords of business tenancies from exercising a right of re-entry or forfeiture, for non-payment of rent (not any other breach of covenant), by action or otherwise, during the “relevant period”. Currently the relevant period will end on 30 June 2020, but can be extended by statutory instrument. That power can be exercised on more than one occasion to extend further this period.

This article considers what steps:

• a landlord can take to protect its position, including early consideration of the potential, if any, to pursue other parties who may be liable under a lease or guarantee
• the knock on consequences for businesses that have assigned a lease of business premises and any guarantors

Position of landlords

Over the last few years we have seen many businesses get into financial difficulty, including many well-known High Street names, with the result of the closure of many commercial premises. These financial difficulties will only be exacerbated by the current lockdown and loss of trade caused by the pandemic. This will cause many to suffer and be unable to remain solvent and ultimately fail when the country returns to the new norm. We may therefore see a spate of tenants entering into some form of insolvency procedure in the coming months. We have already seen some businesses call in administrators.

Although the 2020 Act provides a moratorium to forfeit for non-payment of rent, it does not prohibit a landlord from:

• issuing proceedings for payment of the rent. However, with the Courts also affected by the lockdown, any proceedings may take many months before they can be dealt with.
• serving a statutory demand and ultimately issuing winding up proceedings. Again, any such proceedings may take many months before they can be dealt with.
• serving a notice under Section 17 of the Landlord and Tenant (Covenants) Act 1995 (1995 Act). The 1995 Act provides that a landlord cannot claim rent arrears (fixed charge) from a previous tenant or guarantor that are more than 6 months old unless it has first served a Section 17 Notice, which must be in the prescribed form, informing them of the amount of such arrears.

In view of the current climate, before a landlord decides taking any of the above actions, careful thought should be given not only to its own commercial interests but also for any potential political fallout. We have seen the criticism of Sports Direct who wished to keep its stores open.

The most pressing consideration of the above options is whether to serve a Section 17 Notice because of the strict 6-month time limit. If a landlord wishes to serve a Section 17 Notice, one way of avoiding any potential criticism is to say in its covering letter that because to the time limit under the 1995 Act, it is being served to protect its position. Only after matters revert to some form of normality, can a Landlord then decide whether it wishes to pursue a previous tenant or guarantor and issue proceedings.
Care should therefore be taken not to overlook this time limit and landlords and their managing agents, if any, should ensure to make diary reminders to check the position.

Position of previous tenant or guarantor

As set above, a previous tenant or guarantor that receives a Section 17 Notice have no protection under the 2020 Act. Failure to pay the sum demanded could lead to legal action to which there is no defence.
If a recipient of a Section 17 Notice decides to make payment in full it is entitled to call on the landlord to grant it an overriding lease.

An overriding lease is a concurrent lease and makes the previous tenant or guarantor the immediate landlord of the defaulting tenant. It effectively gives the previous tenant or guarantor the ability to then:

• terminate the lease and occupy the property itself
• terminate the lease and find a new tenant
• exercise the remedies available to landlords for non-payment of rent as above

An overriding lease is not granted automatically and the party claiming one must make a request in writing to the landlord at the time of paying the fixed charge or within 12 months of the date of that payment.