Feb

The looming David and Goliath battles of commercial rent arrears

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In a world where significant constraints are being placed on a landlords’ ability to recover outstanding rents, many suspect that some tenants are using the crisis to avoid paying, or avoid paying in full. This when it is claimed they can easily afford to pay, especially in the case of large international corporations.

Landlords in England and Wales (Scottish legislation differs) still retain the ability to recover full rent and other sums due to them under commercial leases, but practical difficulties often prevent this. Landlords’ urgent cash flow issues are often not helped by the fact that payments may be deliberately withheld, coupled with long delays in court proceedings.

Section 82 of the Coronavirus Act 2020 still applies. It prevents any major threats to tenants’ tenure through lease forfeiture in England and Wales between 26 March 2020 and 31 March 2021. This is whether by court proceedings or peaceable re-entry, for the majority of commercial leases, by reason of non-payment of any sums due under the lease.

Depending on the circumstances however, landlords still have other options which might include recovering sums owed by tenants of their commercial properties from guarantors, former tenants, recovering directly from any subtenants, or through going to court for debt recovery proceedings.

Last year the government published a code of practice for landlords and tenants of commercial property across the UK. It has been endorsed by a number of industry organisations including the RICS, but it is voluntary. The main principle of this is “transparency and collaboration”, the government’s aim being to encourage landlords and tenants to act “reasonably and responsibly” whilst the crisis lasts.

A recently reported court case illustrates the point about the alleged unequal balance of power between smaller-scale landlords and large corporations. Fast-food giant Burger King, owned by Restaurant Brands International, a Canadian-American multinational fast food holding company, itself backed by Brazilian-American multibillion-dollar investment firm 3G Capital, is being pursued by one landlord over unpaid rent.

The UK arm, Burger king Ltd, has proposed that its quarterly rent due from last March be waived altogether, rent due from last June be discounted by 70%, and a new lease arrangement entered into whereby rent is linked to sales (turnover rents) after that.

The UK subsidiary of Brands International leases its restaurant properties from landlords and sublets them to the chain’s franchisees. According to The Sunday Times, it is claimed that the company owes £461,174 to the owner of its branch in Queensway, west London.

The court filing by the claimant landlord argues that because of the big difference in the size of the parties, it considers that a more appropriate arrangement, in line with the code of practice, might be a deferral of some of the rent to be repaid over a period of time.

Given the size of the commercial rent arrears problem, which has been building up since the start of the pandemic, the landlord – tenant stand-off is threatening to explode over coming months. With the tenant protection measures still in place for another couple of months, and the courts likely to be overwhelmed when restrictions are lifted, there seems little by way of relief in the short-term.

Neither party in the above dispute has made themselves available for comment.

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