Debt recovery demands and commercial property disputes will dramatically rise as economy opens up, warns law firm

While the recovery of the business environment is of course a hugely positive step for the UK in a post–pandemic environment, the disruption caused by Covid-19 will have longstanding impacts, especially on the commercial property sector. 

Paul Davis, BHW Solicitors
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Here, we spoke to Paul Davis, head of the dispute resolution team at BHW Solicitors, a leading law firm based in Leicester, to understand more about these concerns and what can be done to resolve them.

The hospitality and retail sectors have been massively affected by the pandemic due to forced closures imposed by lockdown measures. Additionally, the manufacturing and industrial sectors have faced hardships of their own.

With these struggles and unavoidable consequences, many business owners who occupy commercially rented space have been unable to meet their debt requirements and deadlines, resulting in an increase of creditors seeking debt recovery and property dispute resolution services.

Commercial tenants, however, have been afforded protection through legislative measures. For example, the Coronavirus Act 2020 imposes a moratorium on forfeiture of commercial tenancies for non-payment of rent. This restricts a landlord’s ability to forfeit a lease for non-payment of rent which presently remains in force until 25 March 2022. 

Similarly, where court proceedings have already been issued against tenants to enforce a right of re-entry or forfeiture for non-payment of rent, any possession order granted by the court will not take effect until 25 March 2022. 

The legislation has also increased the amount of arrears required, to at least 554 days’ rent, in order for commercial landlords to use the Commercial Rent Arrears Recovery process (formerly known as distress) to seize tenant goods. 

Furthermore, landlords cannot bring petitions to wind up tenant debtor companies until 31 March 2022, unless the landlord can show that the debt was not caused by the pandemic, is for at least £10,000, and that the landlord has attempted to negotiate repayment of the debt (this follows the introduction of the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 (SI 2021/1029). 

The government continues to extend protections for commercial tenants by indicating that it will introduce a ring-fencing arbitration scheme. The announcement to “ring-fence” tenant debts was made in June 2021, and in August 2021, a policy paper was published to provide further guidance. The policy indicates that there will be legislation to ring-fence commercial tenant debts accrued from March 2020, until restrictions for different sectors are removed.

Under the scheme, landlords and tenants will need to submit to a binding arbitration in the event that they cannot agree on a repayment plan or waiver the “ring-fenced” arrears to decide how much the tenant should pay. There has been clear indication from the Government that landlords will be expected to share some of the financial burden, however, it has been emphasised that those tenants that can pay, should pay. Despite the above, there are a number of questions that remain unanswered including how the policy will be applied in practice, and whether it will apply to partially closed businesses who continued to operate during the pandemic and lockdown at a reduced capacity. 

At least until the ring-fencing scheme is introduced, a landlord’s main remedy remains a monetary claim in the County Court or the High Court, for payment of the rent arrears. 

Whether or not landlords generally have the appetite to pursue rent arrears claims remains to be seen – in many instances, the cost and delay may make it an unattractive option, and landlords may instead choose to wait for the arbitration scheme or for restrictions on other remedies to be lifted.

Additional difficulties faced by commercial tenants 

Not only are commercial tenants seeing an increase in difficulties surrounding debt collection, but also, due to the increase of flexible working arrangements following the pandemic, commercial landlords, particularly those providing rented office spaces, are facing difficulties with securing new tenants.

Due to these issues, landlords must adapt to ensure they are receiving payments on a regular basis, and this extends to having the necessary protections in place when securing new tenants. 

For example, many landlords have had to compromise by offering rent concessions to tenants by way of reduced rent payments to ensure a steady stream of income.

With many commercial leases being subject to guarantors who guarantee the tenant’s obligations, including rent, landlords can, in these circumstances, pursue a guarantor for payment. 

Landlords will also want to review any loss of rent insurance cover in place to ensure it provides protection for any loss of rental income caused by a pandemic, such as Covid-19 or government-imposed lockdowns.

To support this, landlords are also increasingly requesting personal guarantees to be provided from incoming tenants when granting new leases. It’s important to keep in mind that landlords need to strike a commercial balance in demanding a guarantor at the risk of losing potential tenants in the current climate.

Tenants can also work alongside commercial landlords to minimise these issues and disputes, such as by considering negotiating rent concessions from the landlord. This can include agreeing to pay lower payments but more regularly in an active effort to reduce the debt. By doing so, court proceedings can hopefully be avoided, which is the optimal outcome for both landlords and tenants. 

What can landlords do to protect themselves in the future? 

Naturally, landlords will be looking for ways to protect themselves, should they ever be faced with unprecedented scenarios.  

I recommend a maintained dialogue between landlord and tenant to ensure both parties are fully apprised of the circumstances and what is expected of each other, and how they can work together to see through any period of difficulties without recourse to legal proceedings. 

Additionally, carrying out additional due diligence on tenants can work to reduce the chances of issues in the future. 

Whilst detailed credit checks are important, landlords should also consider inquiring about a tenant’s business plans over the period of the proposed tenancy so that they are satisfied that the tenant will be able to survive a similar pandemic/lockdown, should this ever occur.  

Finally, it is always recommended to seek legal advice with such issues to ensure that any agreement for a rent concession is properly documented, as care should be taken not to say or do anything which could constitute a waiver of forfeiture or a permanent variation of the lease. 

For more information regarding commercial property disputes, please contact Paul by emailing [email protected] or visiting the BHW website.

Kindly shared by BHW Solicitors

Main article photo courtesy of Pixabay