Rob Nicholson of Ashfords LLP and Andrew Walker QC of Maitland Chambers look to what may lie ahead for forfeiture on the ground rent and other arrears
Photo by Ben Garratt on Unsplash
“Landlords are set for a brutal June quarter day: far worse than March. Some landlords may now be regretting their initial rent concessions”
The post Covid-19 economic downturn is now predicted to lead at least to a short but deep recession. With that context in mind the moratorium on new forfeitures, under section 82 of the Coronavirus Act 2020 (which runs until 30 June, but could be extended), is clearly only a temporary stopgap in what will soon become a far more complicated equation for tenants and landlords alike.
If this post Covid-19 prediction proves right, will any landlords have an appetite to forfeit? Almost certainly the answer is ‘yes’, at least among those who foresee recession, rather than an economic depression. Why might that be?
Landlords are set for a brutal June quarter day: far worse than March. Some landlords may now be regretting their initial rent concessions, but most landlords will be facing the same issue – widespread non-payment or under-payment of rent. Landlords unable to cover their own costs and facing breaches of their financial covenants, may have no choice but to use every measure available to recover rent and other payments. If they fail, what next? Those with sympathetic funders and tenants who are complying with their other covenants may hold their nerve. For others, possession may follow.
In some cases, forfeiture will be a way to improve what can be offered to the market to realise capital quickly. In others, it will be a route to bringing forward development or change of use proposals, especially those which have already been held up by determined tenants or the cost of statutory compensation to long-standing tenants with 1954 Act-protected leases. Worries over a public or market backlash may act as a deterrent, but for cash-rich investors betting on a sharp but short downturn, the potential profits may be tempting. If assets with real potential are available at a discount, with vacant possession, there will be a demand for them.
It is doubtful whether the current law of forfeiture enables our courts to hold the balance between landlords and tenants in such challenging times. Payment of arrears in full is required, or a rule of thumb, for a tenant to get relief. Without other measures to help tenants, landlords will hold the legal whip hand, and may choose to use it.
It is no easy task to give effective help to landlords and tenants in a way that reflects their individual circumstances. A new ‘breathing space’ regime is being mooted but could be a blunt tool, and it may prove unwieldy and not suitable for every situation. With a little foresight, though, part of the response might be some much-needed property law reform.
In 2006, the Law Commission made the latest of several proposals to clarify and modernise the law of forfeiture, and to encourage transparency and cooperation. The proposed summary procedure – and the abolition of peaceable re-entry – may have been a stumbling block, but a decision could surely be made swiftly on this, given the will to do so. The Report included a draft Bill, so with some careful revision to address changes that have taken place over the last 14 years, reform is legislation-ready. A tailored, ongoing moratorium against all enforcement action might then build on that new structure for forfeiture. The mandatory Code of Conduct introduced this month in Australia, which provides for targeted rent relief for SME tenants during both the pandemic period and a recovery period, might give food for thought on this.
Whatever our economic future may hold, let us hope that our government proves itself up to the task of protecting the viable businesses that will drive a recovery, without sacrificing our commercial property market in the process.