The Winners and Losers of the UK’s Commercial Rent Arrears (Covid) arbitration scheme

Matthew Bonye, head of our Real Estate Dispute Resolution team, and Shanna Davison, professional support lawyer, recently shared their thoughts on the mandatory arbitration scheme launched earlier this year by the Government in response to arrears accrued during Covid-related closures. The scheme ran for six months ending on 23 September 2022 and, whilst we may continue to see some decisions trickle through for any referrals which were made before the deadline, participation appeared to be much lower than anticipated.

By analysing the scheme and the main awards made under it, Matthew and Shanna ask whether the scheme’s interference with the fundamental principle of freedom of contract has paid off. You can read the full article as published in the Property Law Journal in October 2022 here.

For further information please contact:

Matthew Bonye
Matthew Bonye
Partner and Head of Real Estate Dispute Resolution, London
+44 20 7466 2162
Shanna Davison
Shanna Davison
Professional Support Lawyer, Real Estate Dispute Resolution, London
+44 20 7466 7561

UK landlords seize the reins on commercial rent arrears

The ground-breaking Covid Commercial Rent Arrears arbitration scheme imposed a moratorium on landlord’s enforcement action for ringfenced arrears until 23 September 2022. Tenants have not, on the whole utilised the scheme. As the end-date looms closer and there are no whispers of an extension (unsurprising in the wake of the reshufflings at Downing Street… there are likely one or two items further up their current agenda!), debt enforcement action is on the rise and we are seeing an upturn in landlords and developers considering all of the options open to them to protect income streams in their investments.

In this blog, we highlight two recent cases which will only serve to bolster landlords considering action against defaulting tenants for Covid-19 period arrears.

Landlord secures summary judgment for £141,000 of rent arrears from former tenant and guarantor, dismissing claims that the assignee tenant’s court sanctioned restructuring plan varied the lease or released their liability

Oceanfill Ltd v Nuffield Health Wellbeing Ltd & Cannons Group Limited

This case concerned a gym in Leeds, originally let to Nuffield Health and later assigned to Virgin Active. Nuffield and their guarantor, Cannon, guaranteed Virgin Active’s performance of the lease covenants in the Licence to Assign.

In 2021, the High Court approved a part 26A restructuring plan for Virgin Active under the Companies Act 2006. The effect for the landlord, Oceanfill, was that all past, present and future payments which Virgin Active were obliged to make under the lease were compromised. Oceanfill received a lump sum under the restructuring plan, but it fell (very) short, so it issued proceedings against Nuffield and Cannon for the shortfall.

The defendants argued that the restructuring plan had varied the lease so that payments had not fallen due to invoke their obligation to pay under the term of the Licence. In the alternative, they argued that the restructuring plan operated as a variation of the lease and as they had not consented to any variations, it had released their obligations in the Licence.

Both defences failed. Whilst the restructuring plan released the tenant’s liability, it did not vary the terms of the lease. The Licence was clearly drafted that a release would not arise on a variation of the lease but could only be given under seal (ie in a formal deed of release).

Court of Appeal dismisses “Covid defences” based on implied terms and failure of basis

Bank of New York Mellon (International) Ltd v Cine-UK Ltd; London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others

Avid readers of our blog will recall our previous posts on these cases. The High Court acknowledged that for certain periods it was unlawful to operate the premises as a cinema due to Covid-19 restrictions, and at other times it was uneconomic to do so. But there was no real prospect of the tenants establishing that terms should be implied to the effect that the payment obligations under the leases were suspended during those periods. Nor was there any real prospect of establishing that there had, in the circumstances, been a “failure of basis“. As such, the tenants could not avoid paying rent for the affected period. However, the tenants appealed, leaving uncertainty for landlords with similar cases.

The Court of Appeal has now dismissed appeals against the grant of summary judgment to commercial landlords for payment of accrued rent in two cases where the relevant premises (in each case operated as cinemas) had to be closed for extended periods due to Covid restrictions.

Click here for our full article analysing these cases (previously published on our Litigation Notes blog).

Of course, court proceedings against the tenant or a third-party guarantor are just a couple of the options in the suite of remedies that may be available to a landlord of commercial premises, now that the various moratoriums imposed during the Covid-19 period have expired (and assuming that the arbitration scheme is not extended). Which remedy will be the appropriate next step for landlords will depend on many factors, including the relationship between the parties, the viability of the tenant’s business and whether it holds assets against which a judgment may ultimately be enforced. For forfeiture, the potential for reletting will be critical. However, with the ‘cost of living crisis’ and businesses buckling under the weight of energy costs, landlords will be monitoring tenant default particularly closely over the coming months.

For further information please contact:

Matthew Bonye
Matthew Bonye
Partner and Head of Real Estate Dispute Resolution, London
+44 20 7466 2162
Shanna Davison
Shanna Davison
Professional Support Lawyer, Real Estate Dispute Resolution, London
+44 20 7466 7561
Matthew Weal
Matthew Weal
Senior Associate, Real Estate Dispute Resolution, London
+44 20 7466 7535

Covid-19 and restrictions on enforcement: 2021 update – an end in sight?

Since March 2020, when the Government passed an unprecedented raft of protective measures to restrict a landlord’s ability (in both the commercial and residential sectors) to pursue remedies for the recovery of arrears (but also other covenant breaches), the practical effect has meant that landlords have not been generally permitted to seek to take back premises from tenants based upon forfeiture for non-payment of rent during the Covid-19 pandemic. Additional restrictions on the use of Commercial Rent Arrears Recovery (CRAR) and restrictions on the service of statutory demands to prevent creditors (including landlords) from presenting winding-up petitions helped to complete this circle and afforded tenants with wide-reaching protections against enforcement action throughout 2020.

These protective measures were introduced as separate pieces of legislation but now run concurrently, and were supposed to be temporary in nature. However, throughout the course of 2020, landlords saw the availability of their usual gamut of enforcement options regularly pushed off into the horizon with the Government deciding (often very late in the day) to extend the moratorium/restriction deadlines. Since June 2020, commercial landlords and tenants have been encouraged to seek to agree rent concessions and have restructuring discussions (premised on a non-mandatory Code of Practice applying until June 2021, see here). Whilst commendable in some circumstances, this Code of Practice has not altered the fundamental underlying legal premise that, unless renegotiated with the landlord, rent arrears remain payable by tenants (and any guarantor) eventually.

The start of 2021 appears to be no different for commercial landlords, at least perhaps in the short term.

On 31 December 2020, regulations were passed extending the moratorium on bringing proceedings for forfeiture of commercial premises based upon non-payment of rent (under section 82 of the Coronavirus Act 2020) to 31 March 2021. However, this extension has been described by the Housing Secretary, Robert Jenrick, as “final” and so commercial landlords can perhaps breathe a sigh of relief that the end may be in sight before they can finally forfeit a lease for non-payment of rent without restriction. That being said, the announcement that this extension is supposed to be final was made prior to the announcement of the national lockdown on 4 January 2021, and so it is entirely possible that this date will nevertheless be extended further on the basis that the new lockdown has fundamentally changed the circumstances.

The table below lists the current enforcement rights of landlords which have been subject to restrictions, what those restrictions involve, and when the restrictions will expire.

Evictions ban announcement

Furthermore, on 8 January 2021, the Government announced that it would be extending by six weeks the ban on bailiffs conducting evictions (except for the most serious cases, eg trespass, extreme rent arrears equivalent to six months’ rent, anti-social behaviour, death of a tenant where the property is unoccupied, fraud and domestic abuse) which was due to expire on 11 January 2021.

This means that, whilst the wide-ranging stay on issuing possession proceedings at Court was lifted on 21 September 2020, the practical effect of this announcement means that no evictions can now take place until at least 21 February 2021.The Government has further stated that no evictions are expected until 8 March 2021 at the earliest and this is being kept under review.

What enforcement options remain available to landlords now?

Despite the range of protections currently available to tenants, landlords still have available to them the following range of enforcement measures either individually or in combination:

  • drawing down on rent deposits and seeking top-ups;
  • claiming against current guarantors;
  • claiming against Authorised Guarantee Agreements (AGA) or Guarantees of Authorised Guarantee Agreements (GAGA) for post-1996 leases;
  • claiming against former tenants or former guarantors for pre-1996 leases;
  • deploying the remaining CRAR remedies, subject to the additional restrictions imposed and set out in the table above;
  • (following the lifting of the stay in September 2020) issuing or progressing proceedings for possession, brought on the basis of breach of covenant other than that to pay rent (but subject to the evictions ban restriction referred to above); and
  • County Court/High Court commencement and service of proceedings for debt.

Whilst several restrictions still remain, the Government’s announcement of a “final” extension of the moratorium on forfeiting a lease for non-payment of rent until 31 March 2021 is perhaps an indication of the important balancing act that needs to be made between the competing interests of landlords and tenants, having regard for example to the fact that commercial landlords will generally have their own commitments, most critically in the form of their debt/finance arrangements.

With the national lockdown in full effect at the start of 2021, and a growing sense of unease about when things will “return to normal”, the Government’s latest announcement was an indication of some change of position. It seems entirely possible however that the current circumstances may mean that additional extensions may come into effect despite this. If so, it remains to be seen whether this will be the current (effective) blanket ban, or something more nuanced, perhaps based upon actual ability of tenants to pay. In that regard, the British Property Federation has identified what it calls a class of “can pay, won’t pay” commercial tenants that it considers may warrant an exception to the rule. The position is unlikely to be considered again by Government before early March 2021.

For further information, please contact:

Matthew Weal
Matthew Weal
Senior Associate, Real Estate Dispute Resolution, London
+44 20 7466 7535
Matthew Bonye
Matthew Bonye
Partner, Real Estate Dispute Resolution, London
+44 20 7466 2162
Rhian Arrenberg
Rhian Arrenberg
Professional Support Lawyer, Real Estate Dispute Resolution, London
+44 20 7466 2594