The commercial lettings market remains in a state of flux. We summarise below some recent developments, relevant for both landlords and tenants, with a particular focus on recovery of rent, turnover leases and company voluntary arrangements (CVAs).
Recovery of rent
The landlord’s tools to recover rent have been very much blunted by recent legislation.
- Forfeiture (or re-entry) – is the landlord’s ability to bring a lease to an end due to non-payment of rent or breach of other tenant covenants. However, it is not possible to forfeit a business tenancy for non-payment of rent until 31 March 2021.
- Commercial rent arrears recovery (CRAR) – is where a landlord can take control of a tenant’s goods and sell them at auction with the proceeds of sale being applied against the arrears. New regulations require 366 days of rent outstanding before CRAR may take place, and the restriction remains in place until 31 March 2021.
- Statutory demands – a written demand for payment of a debt, such as rent arrears. If the demand remains unsatisfied after 21 days, this can be used to support a winding-up petition (i.e. as evidence that a company is unable to pay its debt). Currently, a creditor cannot present a winding-up petition on or after 27 April 2020 based on a statutory demand served between 1 March 2020 and 31 March 2021.
So what are the options for the landlord?
- A money only claim – remains possible and a landlord may be able to seek contractual interest and costs under the terms of the lease. Enforcement of a money judgment needs to be carefully considered prior to commencing Court proceedings.
- Rent deposit – this is still available for the landlord to use, subject to terms of the deed.
- Claims against former tenants / guarantors – this is possible; there is a strict 6-month time limit to recover sums from former tenants or guarantors, on which we can provide further advice.
- Forfeiture for non-rent grounds is available – where effected by peaceable re-entry and where service of a section 146 notice is first required. Forfeiture is unlikely, however, to be desirable in view of challenges of re-letting premises.
Time to negotiate?
Whilst it may not be appropriate in all cases, landlords and tenants should try to work together during this difficult period to reach commercial compromises. Amongst other things, landlords may need to consider rent deferrals, temporary concessions or turnover leases (see below). Landlords should take further advice and exercise care when sending side letters to avoid permanent variations to the terms of a lease. If the landlord has a large site, where they might be negotiating terms with multiple tenants, confidentiality provisions may be important.
Turnover rent leases
One way for landlords and tenants to overcome current market challenges is to consider turnover leases. In particular, the uncertainty in the retail, leisure and hospitality industries may see an increase in turnover rents: rents calculated by reference to the turnover generated by the tenant business at the leased premises. This arrangement might shield the tenant from the financial impact of an economic downturn, whilst allowing both landlord and tenant to share the benefits of any uplift in business.
The landlord and tenant will need to negotiate what elements of turnover will be excluded from the rent calculation, such a staff discounts, gratuity tips and VAT. The parties will also need to consider whether external transactions such as click and collect, online sales or takeaway deliveries are to be part of the tenant’s turnover for the purposes of the rent calculation.
Company Voluntary Arrangements (CVAs) and turnover rents
A CVA can be a flexible re-structuring tool for a tenant company. In a CVA, a company makes a proposal to its creditors for a compromise for its unsecured debts. If at least 75% of the creditors vote in favour, the proposal will take effect against all creditors (subject to a challenge under section 6 of the Insolvency Act 1986, i.e. for unfair prejudice or material irregularity, for which there is a 28 day time limit).
- In a CVA, a tenant company may look to reduce the amount of future rent: see Discovery (Northampton) Limited v Debenhams Retail Limited  EWHC 2441 (Ch) – in which it was held that future rent can be compromised provided that the landlord receives, at least, the market rent; and the contractual rent should be interfered with to the minimum extent necessary to achieve the CVA.
- CVAs now being proposed are more likely to see the introduction of turnover rents. For instance, New Look’s CVA (approved) involves moving 400 + stores onto turnover rent, but the CVA is being challenged. As set out above, turnover rent provisions require careful negotiation by the parties’ representatives but a CVA may impose template turnover rent provisions.
- A CVA cannot modify the right of entry or prevent a landlord from exercising a right to forfeit for breach of an insolvency condition. So, if the landlord wants to forfeit the lease in the event of a CVA, a section 146 notice should be served and the landlord should be careful not to waive the right to forfeit.
- A CVA cannot be used to force a landlord to accept a surrender of the lease.
Streathers Solicitors LLP
19 January 2021
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*The Briefing Note reflects the position as at the date of publication. The information in this Briefing Note is not intended to amount to legal advice to any person on a specific matter or case. You are advised to obtain specific, personal advice from us about your case or matter and not rely on this Briefing Note.