No forfeiture for rent arrears

As most businesses, landlords and property solicitors will now know, s.82 of the Coronavirus Act 2020 (“CA 2020”) means there can be no forfeiture for non-payment of rent until July 2020, possibly later (“the relevant period”). But forfeiture has never been the only option open to a landlord whose tenant isn’t paying rent. The government lockdown was announced just two days before the March quarter day, with the inevitable consequence that many businesses did not pay the March quarter day rent. Already, the authors have come across attempts to procure payment of rent in the face of this ostensibly clear and simple prohibition.

Commercial Rent Arrears Recovery

The most obvious work-around is the use of commercial rent arrears recovery (CRAR) under section 72 and schedule 12 of the Tribunals, Courts and Enforcement Act 2007. Section 82(2) of the CA 2020 states that nothing short of express waiver can waive the right to forfeit during the relevant period. As such, CRAR should not amount to waiver, thereby suspending the effect of the recent case of Brar v Thirunavukkrasu [2020] L. & T.R. 3, where the Court of Appeal confirmed that CRAR did (under normal circumstances) amount to waiver.

However, there may be complications in using CRAR. Section 82(2) is currently only effective until 30 June 2020. The taking control of goods procedure in schedule 12 of the 2007 Act is designed to be quick, and the Taking Control of Goods Regulations 2013 (supplemented by CPR part 84) provide a comprehensive scheme for the resolution of disputes where a third party asserts ownership of seized goods (where, for example, equipment is leased or belongs to a director personally). But what happens if the relevant period is extended, and the CRAR procedure is started before, but extends beyond the end of the period in which s.82(2) applies?  Is a landlord to be taken to waive the right to forfeit if, after 30 June, it continues to defend a third party’s claim of ownership of seized goods, even though the tenant is not a party to that dispute? What costs order should be made in the event that a landlord capitulates in light of s.82(2) ceasing to have effect, in circumstances where nobody knows exactly when the relevant period will end? None of this is clear from the CA 2020.

The position with respect to CRAR may be even more uncertain due to more practical considerations arising from Covid-19. For example, Practice Direction 51Z of the CPR, in force on 27 March 2020, postpones all enforcement of possession claims for 90 days, inter alia “to ensure… the enforcement of orders, is carried out so as not to endanger public health”. It could be said that the public health dangers of enforcing eviction would also exist when seizing goods, giving the prospect of further practice directions postponing CRAR. Furthermore, when it comes to actually selling seized goods, they may not raise sufficient funds if auctions migrate online (many LPA receivers have already moved to online-only auctions as a result of Covid-19) at a time when demand for those goods may be depressed.

Insolvency procedures

Many landlords are already threatening to wind up tenants who have not paid their March quarter day rent. The threats are unsurprising: the threat is a powerful one for businesses who have chosen not to pay rather than being in acute financial difficulty. In appropriate circumstances, tenants may apply for an injunction restraining presentation or advertisement of the petition on the basis that the petition seeks to achieve an improper collateral purpose and is an abuse of process. However, applications of this sort are usually related to whether the underlying debt is, all things considered, immediately due. Section 82 does not mean underlying debt is not owed – it merely prevents forfeiture on the basis of that debt.

However, commercial considerations may mean that landlords do not follow through with such threats at this time. A landlord (or any creditor) who uses a petition to obtain payment of a debt risks the debtor actually being wound up. This means the landlord will rank with other creditors, who will only be paid a dividend if secured and priority debts are first paid. Further, even if the tenant paid the rent after the presentation of the petition, that payment would be void by virtue of s.127 of the Insolvency Act 1986 with the effect that the landlord may have to repay the rent to the liquidator. Also, as with CRAR, presenting a petition in relation to rent would waive the right to forfeit if it weren’t for s.82(2). There is a risk of waiver if the life of the petition extends beyond the end of June.

A ticking time-bomb?

Even taking the s.82 prohibition on forfeiture at face value, it may still lead to challenges when the protection ceases to apply. As Katrina Mather pointed out in her recent article, s.82 does not obviate the obligation to pay rent. If in July 2020, after months without trading, businesses cannot pay all outstanding rent due on the March and June quarter days, there will be a wave of forfeitures this summer. This would probably result in a collapse in market rents, which is not good for landlords. The Government will need to address this, to avoid merely postponing the inevitable.

A good place for the Government to start might be the Law Commission’s 2006 report “Termination of Tenancies for Tenant Default”. The report proposed a complete overhaul of the forfeiture and relief procedure, but it was never implemented. Perhaps the inevitable difficulties for businesses once s.82 of the CVA 2020 ceases to apply will focus the government’s attention on more profound reform of this uncertain process.