Recovery of Commercial and Residential Rent Arrears – Where are we now?

Outline

The effect of the legislation introduced since 25th March 2020 on a landlord’s ability to obtain possession and use other remedies against a tenant who is not paying their rent.

Introduction

The Coronavirus Act 2020 (“the Act”) has changed the landscape in this area quite dramatically. Now that further legislation has been introduced to supplement the Act, Practice Direction 51Z has been amended and the Court of Appeal has handed down its judgment in Arkin v Marshall, it seems like a good time to reflect on where we are and where we are likely to be, for several months to come.

Landlord clients with tenants who are not paying their rent need clear advice on what can be achieved during the pandemic and in the months to come and the likely timescales involved. In this article we look at

(1) The steps a landlord may take where possession proceedings have not yet commenced. Given the more extensive remedies available to landlords of business premises, we consider remedies in relation to residential and business premises separately.

(2) The advice to clients on current possession claims following the implementation of Practice Direction 51Z.

Pre-Issue of Possession Proceedings

Residential Premises

There is no specific pre-action protocol for rent arrears claims in the private sector. Landlords should protect their position where possession proceedings have not yet been issued by ensuring that they can provide evidence of any agreements for tenants to defer their rent and/or to pay a reduced sum for a specific period of time. It is also advisable to follow the non-statutory “Guidance for Landlords and Tenants” which was issued in March 2020. The key takeaway is that it may be better to retain a good tenant and to agree a rent-free period for a fixed amount of time, reduced rent for a fixed period of time or to give additional time to pay the rent due during the pandemic, than to seek eviction where such proceedings will automatically be stayed.

Section 81 and schedule 29 of the Act deal with the protection from eviction for residential tenancies in England and Wales. In short, the notice period for notice of seeking possession and notice to quits for assured shorthold tenancies, Rent Act, secure tenancies, introductory, demoted, and flexible tenancies is extended to three months. These changes are reflected in the new notice forms including Form 6a for assured shorthold tenancy and Form 3 for section 8 claims. There is also a new 18-page claim form for those seeking accelerated possession following a s.21 notice.

Those who occupy under licences or unprotected or contractual tenancies are not covered by this three-month extension. They are however covered by the general suspension of possession claims under PD 51Z, which provides that “All proceedings for possession brought under CPR Part 55 and all proceedings seeking to enforce an order for possession by a warrant or writ of possession are stayed for a period of 90 days from the date this Direction comes into force.”

There is a pre-action protocol for possession claims based on mortgage or home purchase arrears in respect of residential property, which the parties will be expected to follow. They will also be expected to be able to evidence compliance.

The amendment to PD 51Z on 20th April 2020 made clear that the fact that a claim issued under CPR 55 will be stayed does not preclude the landlord issuing a possession claim. Given the economic impact of the current pandemic on the economy, landlords will be expected to show that they attempted to communicate with their borrowers and tenants prior to issue and also during the period before the possession hearing. The court is likely to consider the impact of the coronavirus outbreak when dealing with any possession claim issued during this period.

Business Premises

Section 82 of the Act prevents landlords forfeiting for non-payment of rent until after 30th June 2020. TA possession order cannot be made until after the same date. These provisions, however, did not prevent landlords from exercising their rights under CRAR or serving statutory demands for rent arrears, coupled with the threat of a bankruptcy, or winding up petition. The Government announced the closure of both loopholes on 23rd April 2020.

CRAR

The Taking Control of Goods Regulations 2013 (SI 2013/1894), took effect on 25th April 2020. Practitioners may also want to refer to the seventh Coronavirus Bulletin issued by Senior Master Fontaine on 28 April 2020. The bulletin summarises the content and effect of the 2020 Regulations.

The key takeaways are:

• agents may not take control of goods at residential premises and on highways while the restrictions preventing people from leaving the place in which they live, without a reasonable excuse, are in place (regulation 2(4) and (5)). This is due to the difficulties for enforcement agents in complying with social distancing requirements.
• enforcement can continue by other means (for example, by telephone) and at business premises.
• the minimum net unpaid rent that must be outstanding before commercial rent arrears recovery may take place is increased (to an amount equivalent to 90 days’ rent). This increase is set to continue while protections from forfeiture for business tenancies are in place under the Act (regulation 2(6)).

Statutory Demands

We are still waiting for the closure of the second loophole which should be contained in pending legislation known as the Corporate Insolvency and Governance Bill 2020. This Bill has yet to materialise. One might be forgiven for thinking, therefore, that the service of a statutory demand followed by the threat of presentation of a petition is an obvious route to recovering commercial rent arrears. Practitioners should note, however, that an attempt to utilise this government announcement as a reason to restrain the presentation of a winding up petition was rejected in Re Saint Benedict’s Land Trust [2020] HWHC 1001 (Ch.) on the basis that the petition was based on the failure to pay non-domestic rates where the liability orders had been made some time before the crisis arose. Snowden J noted the following:

83. It seems overwhelmingly likely that the proposed legislation will be limited to companies in certain identified sectors of economic activity, and to relate to statutory demands and petitions based upon claims by landlords for arrears of rent. Although the press statement does contain phrases that might, if taken out of context, suggest a wider prohibition, when those phrases are read in the broader context of the announcement as a whole, I anticipate that the prohibitions are not intended to extend to entities [other than those] in the retail or hospitality industry, or to petitions which are not based upon arrears of rent, but are based upon outstanding court orders and longstanding arrears.

In another case heard recently, however, we understand that a judge has restrained the presentation of a petition in relation to a business in this sector. It seems remarkable that a court would grant an injunction where legislation has not yet materialised, but it demonstrates the approach the courts are likely to take where a creditor landlord tries to take enforcement action against a tenant on the basis of rent arrears accruing during the pandemic. Client landlords, many of whom will themselves face cash flow issues at best and are on the brink of insolvency at worst should be in no doubt that reaching a compromise with a tenant that they pay something during this period is a more attractive option than taking enforcement action.

Possession Claims

Claims for possession issued under CPR 55 prior to 27th March 2020, will be in different state of trial readiness. Some parties will have been complying with directions and keenly awaiting the outcome of the possession claim and any counterclaim for damages.

Practice Direction 51Z has the effect of staying all possession claims, both residential and business until 25th June 2020. The Court of Appeal handed down the judgment in Mehmet Arkin (as fixed receiver) v Gary Marshall on 11th May and confirmed that PD 51Z is valid and that whilst a judge has jurisdiction to lift the stay in individual cases, such a discretion is to be exercised in extremely exceptional cases only. It is notable that the Court of Appeal’s own view was that they could not think of a case where such a discretion would be exercised to lift the stay. In practice, this has already started to lead parties to seek to agree directions, because only agreed directions can be endorsed by the courts. Where parties do not agree directions, the possession proceedings will remain stayed, perhaps making it difficult for parties to progress the claim and/or obtain vital information required to settle. Parties will not be able to enforce compliance with directions during the period of the stay, but the Court of Appeal has made clear that failure to comply with agreed directions can subsequently be taken into account once the stay is lifted.

Conclusion

In order to protect residential tenants during the pandemic, notice periods have been increased to 3 months. This applies to notices served between 26th March and 30th September 2020, whatever the reason for possession.

Business tenants who fail to pay their rent are also protected: a landlord cannot forfeit for failure to pay rent until 1st July 2020, and it appears that other enforcement options open to commercial landlords are unlikely to bear fruit if they are based on rent arrears.

Where claims were issued before 27th March 2020, any final hearing will not take place until after 30th June. Unless a hearing date has already been set, due to the backlog of cases it seems unlikely that any possession orders will be obtained until sometime after that. The writers hope that this will lead both to increased inter-party cooperation and greater use of ADR. It remains to be seen how long after the 30th June 2020 deadline or any extension thereof that the courts will remain sympathetic to claims for possession due to rent arrears during this period.

This article was first published in Thomson Reuter’s Practical Law Property Litigation Column.