Originally, the legislation put a stay on proceedings until 30 June, however this was extended again. As of 20th September residential possession proceedings have re-started, although in most cases landlords now have to give 6 months rather than 2 months’ notice and commercial tenants are protected from forfeiture proceedings until January 2021. Understandably, this has raised many questions within the commercial property sector, and the Receivership team has been working with lenders and solicitors to provide some clarity and advise on the best course of action.
Prior to COVID-19, landlords and Receivers could issue proceedings to end a residential tenancy after either 2 months of non-payment of rent (section 8) or no fault (section 21). The notice periods have now been extended to 6 months. Some tenants who did not pay rent prior to the pandemic continue in this manner, highlighting the need in ‘normal’ times for landlords to act quickly.
Tenants are aware that proceedings cannot be enforced until 20 September or January 2021 (depending on whether they are residential or commercial tenants) and often refuse to engage in negotiations. Whatever the reason for rental arrears, when appointed as receivers, we carefully consider whether to issue proceedings, offer incentives to tenants to leave or to renegotiate the tenancy terms.
Understandably, many charge holders have reservations surrounding the reputational risk of enforcing possession proceedings. This is further exacerbated by the fact that it is likely to take between 9 and 12 months to overcome the backlog of proceedings in the courts and FCA guidance is to give borrowers until 31st October 2020 before issuing proceedings. In some cases, it may be better to appoint Receivers who then sell the property as is, subject to the occupancy rather than procure possession due to the backlog in the courts, combined with accruing interest and market risk.
On the commercial side, the picture looks rather different. Government grants for small businesses and rates relief have enabled small businesses to largely pay their rent, encouraging landlords and tenants to work collaboratively. However, some landlord/tenant relationships have been badly damaged; it has been widely reported that a number of household names who have traded throughout lockdown have refused to pay rent posing questions over how much an investor should factor in covenant strength. Investors will not forget these tenants’ attitudes during the pandemic. Such behaviour does present significant challenges, with many other tenants threatening to vacate premises if a turnover rent is not agreed, and others have simply stated they will not pay.
At the moment, commercial tenants are still liable for all rent unless agreement is reached with the landlord. However, many question tenants’ ability to pay arrears, even if they remain in business. If they do leave, will there be occupational demand for the vacant unit? Landlords and Receivers are left with the quandary: is it better to have a vacant building and incur the associated costs or to have a ‘strong’ tenant covenant not paying rent? There is a real risk of being unable to re-let vacant premises in the current climate.
The Receivership team has spent a lot of time considering the best course of action, focusing on the following questions:
- Can the property be easily re-let?
- Is it appropriate to offer tenants an incentive to leave in the current climate?
- What legal action can they take to evict a tenant? Would an injunction be appropriate?
- Can they sell the property subject to its occupation and allow a purchaser to take the risk reducing the property’s exposure to market uncertainty?
- What is best outcome for the lender and borrower?
One guarantee in this uncertain climate is that when the Government schemes end and tenants are left to rely on their own cash flows, there will be distress in the market. As Receivers, we are ready to rise to the challenge and ensure best price is achieved during this tumultuous time whilst tapping into our depth of knowledge and coming up with innovative solutions.