The pandemic has had a significant impact on the economy at large, but in particular on commercial Landlords whose Tenants, for the most part, have been unable to operate their businesses during lockdown. This has put Landlords into a position whereby they are leasing their premises to Tenants who are either unwilling or unable to pay their rent and other monetary obligations.
The UK and the Scottish Government have introduced measures, both binding and voluntary, to help regulate the behaviour between commercial Landlords and Tenants during this difficult period. New regulations were introduced on 1 October 2021 that will reduce, but not eliminate, the restrictions on winding up petitions.
In this article we will provide an update of these measures and an overview of the Scottish remedies that remain available to the Landlord to recover arrears and how they compare to England.
Code of Practice
The Code of Practice for Commercial Property Relationships during the COVID-19 pandemic applies across the UK. This is a voluntary Code which aims to “promote good practice amongst Landlord and Tenant relationships as they deal with income shocks caused by the pandemic”. We have provided an overview of the latest changes in our previous article here.
However, it is important to note that this Code is purely voluntary. There have been two recent English court cases, Commerz Real Investmentgesellschaft mbH and TFS Stores Limited and Bank of New York Mellon (International) Limited and AEW UK Reit PLC, where the courts have emphasised that this Code does not produce any legal effects. It is likely that Scottish courts would take the same approach. For a more detailed analysis of the second case have a look at our article here.
Remedies Available in Scotland
Deposit or Guarantee
If there is a rent Deposit or Guarantee in place, the Landlord could draw down said position or seek the outstanding sum from the Guarantor. The COVID measures do not prevent this remedy in Scotland or England. However, seeking the sum from the Guarantor will only be successful if the Guarantor is solvent.
Winding Up Proceedings
Alternatively, a Landlord could serve a statutory demand whereby the Tenant is required to pay the sum due within 21 days of service and if he does not, the Landlord can seek to wind up the Tenant company.
However, there is currently a temporary restriction in Scotland and England on winding up petitions through the Corporate Insolvency and Governance Act 2020 (CIGA). This prevents a Landlord applying to the court for the winding up of the company if COVID had a financial impact on the company. There is some ambiguity what exactly this means and whether a company that had been in financial trouble before the pandemic hit would be caught by this petition, but there has been no court case on this matter so far. These measures were initially to last until 30 June 2021 and then extended to 30 September 2021.
The CIGA has now been amended by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021. This came into force on 29 September 2021 and, as the name suggests, replaces Schedule 10 of the CIGA. These Regulations provide more restrictions in the way in which winding-up petitions can be presented between 1 October 2021 and 31 March 2022.
From 1 October 2021, the restrictions on issuing winding-up petitions based on statutory demand will be lifted, allowing Landlords to use statutory demand as a way of initiating wind-up petitions. However, the trade-off is that there are new conditions that must be met before a Landlord can start a winding-up petition.
These new conditions are:
The debt is for a liquidated amount which has fallen due for payment and is not an “excluded debt” (i.e. rent due under a lease “which is unpaid by reason of a financial effect of coronavirus”)..
The debt (or total debts) must be £10,000 or more.
A Landlord must serve a written notice to the debtor (a Schedule 10 Notice) seeking that the Debtor to make proposals for payment of the debt. This Notice must contain certain prescribed information. A Landlord can apply to the court to have this condition waived.
The Debtor must make a payment proposal to the Creditor’s satisfaction within 21 days of the Notice. If the payment proposal is not to the Creditor’s satisfaction, then a winding-up petition may be brought. A Landlord can apply to the court to have this condition waived or the 21 day period shortened.
Creditors can rely on a Debtor’s non-payment of a statutory demands to evidence the latter’s inability to pay their debts.
There are also procedures in Scotland which are separate from England. Summary diligence applies where the lease is registered in the Books of Council and Session. In these circumstances a Landlord can instruct Sheriff Officers to:
Serve of a charge for payment. This is a formal demand for payment. If payment is not made within 14 days, the expired charge can be used as a basis for:
Attachment - seizing of movable property belonging to the Tenant to be auctioned to clear the debts if payment is not made; or
Winding Up Petition – however, as mentioned above, winding up petitions have been temporarily suspended if the company is in financial difficulties due to COVID.
Serve an Arrestment for freezing of bank accounts or debts owed to the Tenant by other parties.
Irritancy (known as forfeiture in England) is another remedy available to the Landlord in Scotland. There is currently a ban on forfeiture in England, but this remedy is still available in Scotland.
In order to irritate the lease, the Landlord must issue a pre-irritancy warning notice on a Tenant followed by a termination notice 14 weeks later. Ordinarily, the notice period would be 14 days, but this has been extended to 14 weeks due to the pandemic.
The 14-week extension to the notice period has recently been extended to 31 March 2022. These extended provisions will, however, be subject to bi-monthly reviews over the next 6 months. Notably, the Coronavirus (Extension and Expiry) (Scotland) Act 2021 Act also permits a further extension to September 2022.
Finally, it is of course possible to raise court proceedings against the Tenant for any outstanding arrears. The Landlord would then have to comply with relevant court rules. There are currently no restrictions against raising proceedings, but it can be expensive and time consuming.
Overall, whilst the COVID measures do limit the remedies across the UK, it is important to note that the summary diligence and irritancy are available remedies in Scotland. There is uncertainty as to how long the COVID measures will be in place, but it is important for Landlords and Tenants to engage with each other at an early stage to avoid the arrears accruing even further.
Please get in touch if you would like advice on the best options before taking action.