UK Real Estate Sector Update: Recovery Of Rental Arrears

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When considering options for the recovery of outstanding rent, landlords should remember that, in addition to recourse via an existing guarantor or a rent deposit, another avenue available to them in these challenging times is to pursue previous tenants or guarantors under a lease that has been assigned.

As the September Quarter Day approaches, landlords should be aware that in order to claim rent arrears from an old tenant or guarantor who may still remain on the hook post-assignment, they need to serve a section 17 notice on the liable party within six months of the arrears becoming due. Failure to do so will bar recovery. Given the impending September Quarter Day, awareness of this six-month deadline is critical, with time running out to serve section 17 notices for arrears arising from the first "lockdown" quarter day in March.

By way of a reminder:

Type of lease

 

Situation relating to old tenants and guarantors

Old lease (lease completed before I January 1996)

The original tenant and its guarantor remain liable for any tenant breaches. If there are any intervening tenants or guarantors, they too are also usually responsible for any default by the current tenant. 

New lease (lease completed on or after 1 January 1996)

When a tenant assigns a new lease, it will be automatically released from future breaches by its successor. The tenant’s guarantor will be similarly released. An outgoing tenant can still remain on the hook if it has entered into an authorised guarantee agreement (AGA) or if the assignment was not permitted under the lease. Likewise, a guarantor may have been required to enter into a guarantee of that AGA (GAGA) which will preserve its liability to the landlord. 

It is worthy of mention that a party who pays the arrears following receipt of a section 17 notice is entitled to claim an overriding lease from the landlord. This will put the landlord in a new, direct relationship with the former tenant or guarantor, and it will be this party who pays the rent and against whom the landlord enforces covenants going forward. Landlords should bear this in mind as a significant period of time may have elapsed since that entity was a tenant or guarantor under the lease, meaning their creditworthiness and covenant strength should be reassessed to ascertain whether the landlord actually wants to establish a direct contractual relationship with that party before serving the section 17 notice.

It should also be noted that the Business Tenancies (Extension of Protection from Forfeiture etc.) (Wales) (Coronavirus) (No 2) Regulations 2020 (SI 2020/960) (Regulations) were laid before Senedd Cymru on 9 September 2020 and come into effect on 30 September 2020. The Regulations extend the protections from forfeiture for non-payment of rent for business tenancies in Wales to 31 December 2020. The position in relation to English leases is that the current protection against forfeiture afforded pursuant to the Coronavirus Act 2020[1] will remain in place until 30 September 2020. At the time of publication we have no certainty on whether the Government will similarly extend the stated deadline in England. Watch this space …


[1] As discussed more fully in our previous bulletins: https://www.mofo.com/resources/insights/200630-uk-real-estate-sector-update.html and https://www.mofo.com/resources/insights/200501-covid-19-key-considerations.html

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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