Options for the Recovery of Rent Arrears

The Coronavirus Act 2020 (CVA 2020) has now come into force bringing with it emergency measures for commercial tenancies. Commercial landlords will no doubt be anxious to know how these measures will impact them and will want to know what, if any, action they can still take in these unprecedented times.

The CVA 2020 introduced limitations on forfeiture, the commercial rent arrears recovery regime and insolvency proceedings. Whilst this no doubt narrows the options, there are still avenues available which could help landlords at this tricky time.

Landlords may feel that the rent deposit secured for the property offers the best course of action at this time. However, if at all possible, landlords should try to avoid relying upon the rent deposit so as to keep it intact for when it is most needed. Landlords should explore the possibility of recovering the rent arrears via a guarantor or former tenant.

It is also a worthwhile exercise for landlords to determine whether their lease is considered to be an “old” or “new” lease. Typically any lease which pre-dates 1 January 1996 is considered to be an “old” lease (although this is subject to some exceptions). If the property is subject to an “old” lease the original tenant and any guarantor will remain liable for any breaches by the current tenant. This liability also usually extends to any intervening tenants or guarantors, therefore creating numerous possible avenues for a landlord to pursue in their efforts to recover arrears owed by a tenant. 

Landlords seeking to recover arrears owed on a “new” lease will be unable to pursue former tenants and former guarantors under the lease. This is because the assignment of a new lease will automatically release the outgoing tenant (and its guarantor) from liability for the breaches of its successor. However, it is not all bad news. If the assignment was not permitted under the lease and/or if the outgoing tenant entered into an authorised guarantee agreement (“AGA”) a landlord should still be able to pursue the former tenant for the arrears. Similarly, a former guarantor may still be pursued if they entered into a guarantee of the AGA.

Once a landlord has ascertained who may be legally responsible for the current arrears they should serve a section 17 notice in accordance with the Landlord and Tenant (Covenants) Act 1995 so as to protect their right to bring a claim. It is vital that landlords serve a section 17 notice on all liable parties within six months of the arrears becoming due. A failure by a landlord to serve notice within the six month period will mean that they become time barred from recovering the arrears.

As it will be soon be six-months since we entered lockdown, it is essential that landlords take steps now to serve a section 17 notice so as to protect their position with regard to any arrears due for the March 2020 quarter day. For those former tenants and guarantors receiving a section 17 notice, they should consider whether the notice has been served in time and in accordance with the legislation.

For former tenants and guarantors it is always worth going through the lease (and any AGA and deeds of variation) to check whether they are indeed liable for the arrears. If, for instance, a guarantor can show that they were not party to a deed of variation this could mean they have been inadvertently released from further liability under the lease. Unless the variation is patently insubstantial or incapable of adversely affecting the guarantor, the absence of a guarantors consent to a variation can be enough to release their liability.

Landlords should be aware however that any party who pays arrears upon receiving a section 17 notice is entitled to claim what’s known as an ‘overriding lease’. If an overriding lease is created, the landlord will need to enforce covenants directly against those subject to the overriding lease (including covenants for the payment of rent). Landlords would therefore be well-advised to carefully consider the suitability of a former tenant and guarantor before proceeding in such a way as to allow the former tenant(s) and guarantor(s) to gain an overriding lease over the premises.

Landlords will no doubt want to know what avenues remain open to them. At JCP, our Property Dispute Solicitors are on hand to provide tailored advice to guide landlords through their options during this challenging time.

For more information contact Head of Property Litigation, Sarah Davies, on 01792 529 617 or email sarah.davies@jcpsolicitors.co.uk.