Routemap to Recovery - Commercial Leases and Covid-19

Property Update

We are now two years on from the start of the pandemic – two years where there has been significant government intervention and support for businesses including alterations to the usual approach to rent arrears and termination of leases.  In this first of our series of property related insights for Insolvency Practitioners, we outline the current position for commercial leases both north and south of the border and what we think might happen next.

Scotland

Irritancy for non-payment of rent

There is no formal bar on irritancy for non-payment of rent in Scotland at present (in contrast with the situation in England and Wales).  However, landlords need to give tenants 14 weeks’ notice of a missed rental or other monetary payment before the lease can be irritated.  In practice, this has prevented many leases from being irritated as most tenants are able to find funds to pay the rent during the 14 week notice period.  This is currently scheduled to end on 31 March 2022 and return to a 14 day notice period for missed rental payments.  While it is easy to see why many think this will lead to a raft of irritancy notices being served on 1st April, and that might well be the case, our landlord clients have benefitted from rent recovery actions being taken via our debt recovery team.  The ability to recover rental arrears via enforcement at the same time as having a unit remain in continued occupancy is a trend we believe will continue throughout 2022.

Pursuing rental arrears

There is no current bar on debt recovery actions for rent arrears in Scotland.  Landlords may also want to check if leases permit summary diligence which would allow charges for payment and other actions such as arrestment of funds to be pursued without the need for court action.  This ability to proceed straight to enforcement for recovery of arrears whilst leaving the lease in place and a unit in continued occupancy has proven invaluable to many of our landlord clients.  It is a tactic we foresee continuing throughout 2022.

While debt recovery actions and summary diligence for rent arrears are currently permitted in Scotland, statutory demands and winding up petitions cannot be issued for debts relating to leases.  Any debts related to a lease are excluded debts for the purposes of a winding up action until at least 31 March 2022.  We suspect that protection will be extended beyond 1st April 2022.

England and Wales

Forfeiture of leases

Landlords are unable to bring commercial leases to an end by forfeiture until 25 March 2022.  This has been in place since 26 March 2020 and any unpaid rent incurred during that period (and any interest due on it in terms of the lease) will remain due once the prohibition on forfeiture ends.  While we foresee an uptake in the still unclear arbitration provisions for these rent arrears (see further below) it is difficult to see any landlord wanting to suddenly find themselves with a raft of unoccupied units that they need to re-let.

Pursuing rental arrears

As in Scotland, statutory demands and winding up petitions are not currently available for rental arrears and other debts relating to leases.  Debt recovery actions for rent arrears incurred during the pandemic may soon also be prohibited if the Commercial Rent (Coronavirus) Bill passes.  It proposes enabling courts to pause any court actions for rent arrears raised from 10 November 2021 with the intention that rent arrears incurred during the pandemic ought to be dealt with in an arbitration process instead.  We will be looking closely at how the courts interpret and implement these wide ranging powers and we foresee significant arguments being made on where the balancing of interests between landlords and their tenants should lie.

Arbitration for pandemic rent arrears

The Commercial Rent (Coronavirus) Bill which is currently making its way through Parliament intends to create an arbitration scheme for pandemic rent arrears.  It is to focus on businesses that were forced to shut during the course of the pandemic.  For landlords and tenants that cannot agree a deal on rent arrears incurred during the pandemic, an arbitrator will be asked to make a decision on what is to be paid.  In coming to a view on the sum payable, the arbitrator will have to balance preserving the viability of the tenant’s business against preserving the solvency of the landlord.  In addition to protections from forfeiture, while arbitration is available or ongoing, landlords will be prevented from raising debt recovery actions for the debt or from petitioning to wind up the tenant. We foresee larger tenant entities being afforded an opportunity to cause their landlords significant problems with this brand new procedure, and for landlords who have already faced months of cash flow problems caused by non-paying tenants that could result in significant financial distress.

Code of Practice – UK wide

The government issued an updated code of practice for landlords and tenants of commercial property on 9 November 2021.  It is not binding on parties but in many respects mirrors the considerations for arbitrators in the proposed arbitration scheme in the Commercial Rent (Coronavirus) Bill.  For tenants that are unable to meet their lease obligations in full, the code of practice expects landlords and tenants to negotiate to share the cost of pandemic rent arrears.  Landlords are expected to waive some or all of the debt if possible.

It is our view that 2022 will see another raft of high profile commercial lease disputes.  As always, landlords and tenants should get proper expert advice on any issues that they are facing, as getting that advice early can bring about outcomes that are lost if financial difficulties arise or become more acute.

Eilidh MacEwan by email: emacewan@gilsongray.co.uk or by phone: 0131 285 1809 / 07376 192 463. 

Steven Jansch by email: sjansch@gilsongray.co.uk or by phone: 0131 516 5361 / 07841 920 100. 

Craig Darling by email: cdarling@gilsongray.co.uk or by phone: 0141 530 2044/07841 920 467

The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray