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Fail to plan and plan to... : practical considerations and steps for landlords and tenants in the run up to 30th June 2021

We all know how this saying ends, and the Government has reiterated recently that landlords and tenants should work together on commercial rent arrears issues while the Covid-19 restrictions are wound down. The present moratorium on forfeiture for unpaid rent has been extended until the end of June 2021. Landlords are also only entitled to exercise CRAR (Commercial Rent Arrears Recovery) in the most extreme cases, with 447 days’ rent needing to be unpaid.

In short, there is no real news and at first sight little has changed. However in some cases tensions are mounting, as are the arrears. While this extension will bring short term relief to tenants and further frustration to many landlords, both are advised to ensure their houses are in order ahead of the end of this extension. So what should they do?

The Government’s message throughout has been that landlords and tenants should collaborate to reach a solution which is mutually acceptable. Any leasehold relationship is precisely that, a relationship, and a key element is trust or at minimum a working relationship between the parties. While there are many tenants who have and continue to struggle, particularly in retail, leisure and hospitality, others have been able to seize opportunity. Those capitalised tenants, who landlords perceive could afford but have chosen not to pay rent, must be prepared to repay the arrears or risk a permanent breakdown in the relationship. Landlords in turn have obligations to third parties, especially lenders and shareholders. If discussions do not take place, with any increased ill-will the opportunity for a negotiated and agreed way forward could be lost irretrievably.

Many have heeded the message and reached agreements to defer, reduce or write off rent arrears. Key for both landlords and tenants is to ensure that this is properly documented to ensure that there is no uncertainty in the run up to June 2021 which could result in peaceable re-entry and subsequent relief from forfeiture proceedings. Even if previous discussions have been unsuccessful, renewed attempts are highly advisable. Inevitably at some point the moratorium will end, possibly at quite short notice.

While landlords can still recover rent arrears via the Courts, generally this process is slower than usual due to pandemic-related backlogs in many cases meaning additional costs and delays. Tenants should be aware that landlords will be carefully reviewing the financial position of their tenants to determine how they will proceed. If a tenant is in financial difficulty, landlords are unlikely to be the only creditor, albeit that they may be one of the largest. Perhaps they are performing well, which may only compound the landlord’s frustration with any arrears and reduce the opportunity for an agreement to be reached ahead of June 2021.

Landlords may be counting down the days until they can remove non-paying tenants, but the usual warnings about vacant premises are more relevant than ever. Landlords will face the associated liabilities including business rates, and in some sectors and locations could find securing a new tenant with a proven background more difficult than ever. Early discussions with agents could prove invaluable in determining strategy. We may also see the existing shift towards shorter leases exacerbated, with more flexibility around break clauses and rent reviews as a result of the uncertainty caused by Covid-19.

It is widely reported that the property market has bucked expectations and overall is thriving rather than struggling. Prospective purchasers, and new landlords, should be determining their strategy at an early stage and ensuring that they have everything necessary in place. Perhaps the property’s tenant is one of those choosing not to pay and will be pursued with a debt claim or insolvency action once the moratorium ends. If so, the landlord may need an express assignment of the arrears debt to avoid falling foul of the registration gap on account of any Land Registry delay in the registration.

The Government will shortly be calling for evidence on commercial rent arrears and setting out proposals for post June 2021. This might include a phased approach to avoid a cliff-edge scenario and could look at lease length versus the level of arrears, with landlords being able to take action in the most serious cases (including higher value / more protracted arrears) first. More will become clear but in the meantime, preparation, discussion and if at all possible reaching an agreement or at least some understanding before 30th June all remain key.

For more information on the article above please contact Warren Reid or Sophie Michaelides.

 

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