Landlords, don’t let the window of opportunity March past…
Landlords need to be aware that if they haven’t served a notice on former tenants and guarantors by 24 September 2020 then they lose the opportunity to recover the March quarter rent from them.
The Coronavirus crisis and resulting lockdown hit in March 2020, right before the March quarter rent fell due. Some tenants have defaulted on the March quarter payment, either unable or unwilling to pay, knowing that commercial landlords are currently generally unable to forfeit leases or exercise CRAR.
The government’s Code of Practice for Commercial Property Relationships during the COVID-19 Pandemic states that tenants who are in a position to pay their rent in full should do so. If tenants are unable to pay then they should provide justification to their landlord for why they need alternative arrangements. Landlords are advised to provide support to tenants where reasonably possible, having regard to their own financial commitments.
Many tenants have wrongly interpreted this guidance to mean that landlords cannot sue for arrears. This is incorrect and the guidance makes clear that the legal position is that tenants are liable for covenants and payment obligations under the lease, unless it is renegotiated by agreement with landlords.
Landlords are able to take legal action to recover the rent arrears, service charge, insurance, interest and costs by bringing a debt claim for breach of lease, and many are choosing to do so.
But what if the tenant can’t pay? What are their options? Landlords can seek to draw down from any rent deposit or they could also look to recover against a guarantor. Often overlooked though are former tenants or their guarantors. Ignoring them for too long could be costly.
Landlords can pursue former tenants (or their guarantors) for the rent arrears of current tenants where they are due under leases which were granted after 1 January 1996 and where an Authorised Guarantee Agreement (AGA) has been entered into. Suing both the tenant and former tenant enables a landlord to maximise its chances of recouping the arrears.
However, landlords must notify a former tenant/guarantor promptly if they want to recover unpaid arrears which have accrued by the current tenant’s default. Section 17 of the Landlord and Tenant (Covenants) Act 1995 stipulates that a former tenant will not be liable to pay any sums due from the current tenant unless a “s.17 Notice” is served. A s.17 Notice must be served within 6 months of the arrears becoming due. If a Notice is not served, then the landlord loses the right to sue the former tenant/guarantor for the arrears that are over 6 months old.
Before serving a s.17 Notice, a landlord should be aware that a former tenant or guarantor who pays all sums set out in the notice, has a right to request an overriding lease meaning that they would become the landlord’s new tenant. Landlords should only serve s.17 Notices on former tenants/guarantors that they would be prepared to have as their tenant going forwards.
The deadline for pursuing former tenants/guarantor for the March 2020 quarter rent is fast approaching with landlords needing to have served a valid s.17 Notice on or before 24 September 2020 if they wish to pursue a claim against a former tenant/guarantor for the March 2020 quarter.
Landlords should therefore be doing the following:
- Consider the period of arrears outstanding and whether it is less than 6 months’ overdue;
- Check their leases and see whether a former tenant entered into an AGA;
- Consider serving a s.17 Notice on a former tenant or former guarantor; and
- Check the notice provisions in the lease to ensure the s.17 Notice is served in accordance with the lease provisions and served in time.
If you would like advice on recovering rent arrears from tenants or former tenants, please get in touch with our Property Litigation team to discuss how we can help.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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