Can a tenant who wants to assign its lease be made to pay rent arrears as a condition of doing so?

The Covid-19 Pandemic has drastically affected the economy. It has heralded new legislation that has changed the landscape in which landlord and tenant relationships in the commercial and residential spheres must now operate. Further legislation is on the horizon for a new scheme for dealing with rent arrears as detailed in our article here.

In the context of there being significant restrictions on a landlord to enforce payment of rent arrears because of the Coronavirus Act 2020 and the practical delays in issuing proceedings, getting cases listed for hearings and in enforcing judgements, how can a landlord improve its position to have rent arrears paid?

Assigning a lease

If a tenant whose business is struggling seeks a licence to assign from the landlord to assign the remaining part of its lease to an assignee, can a landlord refuse to give that licence to assign until all rent arrears have been cleared?

The answer to this question will depend upon the terms of the lease, the extent of the rent arrears and all the facts and circumstances of how the rent arrears arose. Whether or not a landlord has unreasonably refused consent to a licence to assign depends upon all the circumstances. Clearly, where a tenant is in breach of its covenant to pay rent, this may be a situation where it is reasonable to refuse the licence to assign. However, if the tenant is struggling to pay the rent and where there is a ban on forfeiture proceedings being brought for rent arrears by any landlord until 25 May 2022, should the landlord consider a licence to assign anyway?

Potentially, a request to assign the lease by the current tenant may give the landlord an opportunity to negotiate a settlement of the accrued rent arrears. It also presents an opportunity for the Landlord of having a new tenant who can pay the rent and so may improve the Landlord’s risk of incurring further rent arrears. It is still a situation which would need careful consideration. An independent guarantor for the incoming tenant is still of great value. The conditions imposed by the Landlord of agreeing to a licence to assign could still be challenged and if found to be unreasonable, could be unenforceable. But we have seen creative proposals being made by both our Landlord and Tenant clients in these new and challenging times.

Options for rent collection

What are the options for the Landlord to collect rent arrears from the outgoing tenant where an assignment is sought? The landlord could insist upon a proportion of the rent arrears being paid as a condition of agreeing to a licence to assign. If the outgoing tenant can afford to, it would be preferable to have this payment made simultaneously with the licence to assign. Realistically, this may not be financially possible for a tenant whose business has been affected by the Covid-19 Pandemic.

Experienced commercial landlords will be aware of the risks of waiving rights to forfeit a lease. Prior to the implementation of the Coronavirus Act 2020, any action by a landlord, where it had the right to forfeit a lease would be lost if the Landlord consented to a licence to assign a lease. However, there is specific provision within the Coronavirus Act 2020 that states that no conduct on the part of the landlord will be regarded as waiving a right to forfeit the lease until after 25 March 2022 unless the landlord gives an express waiver in writing. This does open new territory for the Landlord to explore. 

Post COVID rules

A landlord may be able to negotiate with the outgoing tenant and incoming tenant that it retains the right to forfeit the lease after agreeing to a licence to assign as a way of enforcing payment terms with the outgoing tenant. Whether an incoming tenant/assignee of the lease would agree to such a provision remains to be seen. It would also depend upon the circumstances and the nature of the relationship between the outgoing and incoming tenant. Retaining the right to forfeit the lease for the outgoing tenant’s rent arrears may be regarded as unreasonable. But it might be an option that is of interest to all; the Landlord gets a new paying tenant, the outgoing tenant pays a proportion of the rent arrears over time and avoids the prospect of other action by the landlord detailed below and the incoming tenant acquires new commercial premises.

The new legislation introduced to cope with the effects of the Covid-19 pandemic on the economy, and in particular, landlord and tenant relationships introduces the potential for previously unthinkable solutions between now until 25 March 2022. It is feasible for a landlord and tenant to negotiate a licence to assign with conditions for payment for the rent arrears without the landlord waiving its right to forfeit the lease. A guarantor for the incoming tenant should be considered. In circumstances where the outgoing tenant is in financial difficulty, careful consideration should be given to the value of an authorised guarantee agreement.

A landlord still has the right to pursue other courses of action against a tenant for rent arrears including:

• A money claim for the debt or mesne profits exercising commercial rent arrears recovery.
• Drawing down on a rent deposit.
• Claiming against guarantors.
• Serving a statutory demand (although there are restrictions on the presentation of a winding up petition and so the threat of a statutory demand may be reduced).

In addition to the cost benefit assessment of the above options, landlords also need to consider the realistic time frame of court action. In practical terms there is significant delay in all aspects of the Court system, from issuing through to enforcing.

Commercial Rent Arrears Recovery (CRAR)

Whilst landlords still have the option to exercise commercial rent arrears recovery, in practice, substantial rent arrears are required before this action can be taken.

With effect from 25 March 2021, the increase in the minimum net unpaid rent that must be outstanding before CRAR can be used was extended to 457 days between 25 March and 23 June 2021 and since then, 554 days rent must be due from 24 June 2021.

At the current time, 554 days rent or approximately 1 ½ years rent must be outstanding before CRAR can be exercised.

Forfeiture for Breach of the Lease other than Rent Arrears

Whilst a landlord is permitted to take forfeiture proceedings against a tenant who has breached lease covenants other than payment of rent arrears, the backlog of cases and the delay in getting hearing dates listed at Court makes this a less attractive option.

How Pinney Talfourd can help

At Pinney Talfourd we have a team of solicitors with a wealth of experience in both the residential and commercial property sectors who can:

• Ensure that problems are resolved in the most cost-effective way and at the earliest stage.
• Advise commercial clients on every type of landlord and tenant dispute in relation to both freehold and leasehold property, commercial and residential.
• Routinely assist with resolving disputes concerning service charges, covenants, agreements, dilapidations, possession and forfeiture.
• Advise on a company let agreement at the outset and to assist in obtaining a possession order.

More information

If you wish to speak to a member of the team about this, please contact Lisa Eastwood.

This article was written by Lisa Eastwood, Senior Associate in our Residential Property Litigation Team. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of August 2021.