The Return of Forfeiture - What Are the Options?
When the coronavirus pandemic began in March 2020, the UK Government sought to protect the interests of commercial tenants by placing a moratorium on landlords terminating (forfeiting) leases for non-payment of rent.
From 24 March 2022, this moratorium has to a large extent been lifted following the Commercial Rent (Coronavirus) Act 2022 coming into force. Two months on, are landlords exercising their rights to take back their premises? What restrictions remain?
Peaceable Re-Entry and Forfeiture
We are increasingly seeing landlords who have not been able to come to an agreement with their commercial tenants over rent accrued during the pandemic considering forfeiture as an option. Indeed such landlords, more than ever, are choosing to 'peaceably re-enter' the premises rather than forfeit by way of Court action.
During the pandemic most landlords have taken a pragmatic approach working with tenants to agree a concessionary rent to allow them to trade through. This has been in line with the various voluntary codes the Government has brought in over the period that have asked for such collaboration. There are however instances where landlords consider tenants can pay but are withholding rent or have no realistic ability of meeting lease obligations moving forward and feel the best option now is to seek to bring the lease to an end.
In making such decisions landlords will take into account any guarantors, original tenants or assignors who they may be able to pursue for the arrears as well as the property market generally. Re-letting opportunities and the likely rent obtainable in granting a new lease will be relevant. Landlords will also take into account the likelihood of having a liability for business rates before a new tenant is found, the cost of insurance of an empty unit and perhaps development potential and change of use.
Once a decision has been made to forfeit there is then a choice as to whether to forfeit the lease by re-entering or by getting a possession order. If the premises contain residential parts which are occupied Court action is necessary.
Considerations When Forfeiting a Lease
It is likely to be considerably cheaper to forfeit a lease by way of peaceable re-entry, with immediate expenses largely limited to the costs of bailiffs and locksmiths attending the premises. Furthermore, the court is experiencing continuing backlogs due to the pandemic so more than ever there will be Court delays in forfeiture proceedings being processed by the Court and a hearing listed meaning that peaceable re-entry will be even more favourable where time is critical. That said, there are circumstances where it is more appropriate to go down the Court route and have the re-possession sanctioned by the Court before any action is taken to exclude a tenant. It is important that you consider the options in detail with your solicitor. The right to re-enter must be exercised peaceably, meaning no excessive force is used to gain access to the premises. It is a criminal offence to use violence to gain entry if somebody is physically at the property and that person is opposed to the re-entry. The bailiffs appointed to conduct the forfeiture will therefore normally re-enter outside of business hours.
It should be noted that once the lease has been forfeited the landlord will be responsible for goods left on the premises. Often formal notice will be needed to deal with those goods and clear the premises. Often arrangements are made to allow the tenant the opportunity to come on and remove those items.
Forfeiture is a very old, rather draconian remedy available to landlords and there are lots of hurdles for landlords to get over and work around before they are allowed to take back premises. It should not be underestimated that this is a technical area of law. For example, it is important to ensure the right to forfeit has not been waived. Taking legal advice at an early stage before contacting tenants and demanding future rent is important in order to maintain options.
Considering The Commercial Rent (Coronavirus) Act 2022
As mentioned above, this Act has generally lifted the moratorium on forfeiture that was imposed in the initial Coronavirus legislation. It has however ring-fenced certain debts relating to arrears for periods where business were obliged to close (the protected period) and introduced mandatory arbitration for those arrears before any recovery action is allowed for those arrears, including forfeiture action based on those debts. If such debts are not referred to arbitration within 6 months of the Act coming into force landlords will be free to forfeit for those arrears too.
This process is designed to provide balance between the interests of commercial landlords and tenants. Draw downs on deposits in respect of arrears from protected periods can also be subject to arbitration.
It is early days as to how many arbitrations we will see, bearing in mind that the financial position of landlords as well as tenants will be under scrutiny. Arbitration should still be seen as a last resort.
Key Considerations
We have seen the number of forfeiture instructions steadily increase since the latest legislation. Landlords are showing their willingness to take back premises when the circumstances are right. They are pleased that the option of forfeiture has returned and they are now better able to tackle defaulting tenants. Often we are being instructed to forfeit for the most recent arrears and are then considering options regarding the arrears for the protected period separately.
Remember not to take the risk of waiving the right to forfeit if as a landlord you are considering taking premises back. Speak to your solicitor. You are likely to have more options now that most of the restrictions on enforcement have finally been lifted.