ALAN HAMBLETT ADVISES A CONSIDERED APPROACH TO COLLECTION OF TENANT DEBT
Collecting debts whilst maintaining a reputation for fairness is a vital aspect of a landlord’s endeavour to ensure steady cash flow and to keep business afloat. The legal landscape has changed very rapidly since the beginning of the lockdown, and landlords are having to adapt their collection methods to fall in line with special government regulations on debt recovery.
So, what has changed? First, many tenants are no longer trading and have no income unless there is a healthy online trade. Many landlords have offered to defer rent or even cancel it altogether for the March quarter. However, with trading still not having resumed fully in June, something that may continue until September a long term view must be taken.
There is much talk of pubs, restaurants and cafes not re-opening for a long time after other businesses have returned to some sort of normality – and some may never re-open. We have already seen high profile names going into administration. Three quarters of restaurants in the UK have warned that their businesses may not survive with social distancing measures in place. Operators have suggested that new measures designed to enforce social distancing could pose an ‘existential threat’ to their businesses, according to the Financial Times (17th March 2020).
Second, even if the tenant is still trading or has money in the bank, many court procedures have been taken away by government intervention. There is a moratorium on evicting tenants, so landlords can no longer terminate the lease for non-payment of rent (see s82(1) of the Coronavirus Act 2020).
The government has also temporarily banned the use of statutory demands and winding up petitions until 30 June where a company cannot pay its bills due to coronavirus. Government regulations are also providing tenants with more breathing space to pay rent by preventing landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent. In practice, bailiffs are observing social distancing anyway and are not taking enforcement action during the lockdown.
A reasonable landlord should negotiate a realistic payment plan for any arrears, while assisting a tenant to ensure that the position does not deteriorate further. It should not be necessary to bring in the bailiffs or go to Court. That is even more so the case now.
Grants and loans are available, but these will not provide enough cover for a long period of closure and tenants have other debts to pay as well as the rent and service charge.
Payment holidays seem attractive, but the debt will need to be paid sooner or later. When these restrictions are lifted, it is inevitable that every creditor – including, of course, the government – will be chasing what little cash is left. It is fine for the government to be seen to be helping business by preventing enforcement action, but it would be hypocritical in the extreme if it elbows its way to the front of the queue at a later date – and as the preferential status of government debt on liquidation was making its comeback before the UK lockdown, so that is precisely what will happen.
(HMRC used to have preferential status ahead of all other creditors upon the insolvency of a business but George Osborne scrapped that under his Enterprise Act to put all unsecured creditors on an equal footing. This government has brought back preferential status for HMRC so that it gets the first bite of the cherry ahead of any other creditors – even secured creditors such as banks – for arrears of VAT, PAYE (including student loan repayments), employee National Insurance contributions and Construction Industry Scheme deductions. This was due to come into effect on 6 April but has now been put back to 1 December 2020).
It is still possible to issue County Court proceedings to obtain judgment and, following the entry of judgment, to take enforcement action through the court against the assets of the tenant. This will include not only assets at the business premises but also any other assets belonging to the tenant at any other address. If the tenant is an individual, that will of course include assets at their home.
While bailiffs and HCEOs are not venturing out at the moment, landlords will need to be in a position to proceed as soon as restrictions are lifted. This means not waiting until then to issue proceedings - landlords will need to have judgment by then. The county court system is slow at the best of times but it is glacial now.
“Find out what they can realistically afford to pay and think of the long-term relationship.”
Remember that it is also possible to pursue guarantors for payment (if there are any), and this might present a better alternative to putting the tenant out of business.
Increasingly, tenants are resorting to insolvency law to protect themselves and are using the voluntary arrangement or administration procedures to protect their businesses from the claims of landlords and other creditors – particularly if landlords are unwilling to agree rent reductions or rent holidays.
The best way for landlords to avoid a bad debt and to maintain a good reputation for fair dealing is to talk to the tenant. If that does not work though, landlords need to act quickly and get ahead of the pack.
Court proceedings should be considered a last resort but that conversation with the tenant should give an early indication as to whether there is a genuine intention to pay the arrears if given an opportunity to do so.