Update for landlords: action against commercial tenants in Scotland during COVID-19 (UPDATED)

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The COVID-19 pandemic and the related emergency legislation introduced by the UK and Scottish Governments has had a significant impact on the remedies available to commercial landlords, in the event of default by tenants. With most of the country currently subject to Level 4 restrictions, there remain some significant obstacles for landlords in trying to enforce lease obligations against tenants.

Landlords and tenants must, in the first instance, be mindful of the UK Government's "code of practice for commercial property relationships" which urges them to seek to compromise whenever possible, having regard to the commercial and financial pressures on each of them.

This note summarises the enforcement tools available to commercial landlords in Scotland at present. It should be noted that, in certain respects, the position in Scotland is markedly different to that in England & Wales.

For more information, please see our interactive toolkit on lease enforcement in England & Wales, Scotland and the Republic of Ireland (Real Estate Possession and Enforcement Tool Kit), as well as our short video outlining the terms of the code of practice for commercial property relationships (Training video: The code of practice from UK Commercial Property).

Debt recovery

We look, first, at the tools available for recovery of rent and other sums. We shall then consider lease termination (irritancy) and recovery of possession.

Summary diligence

"Summary diligence" is the collective name given to the suite of remedies available to a landlord under a lease which contains a "warrant for preservation and execution" and which has been registered. These allow a landlord (without first having to go to court) to seek to recover arrears of rent (and sometimes other sums) as if it held a court order for payment.

Summary diligence was unavailable during the first lockdown but is currently available as normal (subject to certain limitations which arise as a matter of practicality). Generally speaking, Sheriff Officers will only be able to carry out summary diligence at premises which are open and trading. This will predominantly relate to tenants which are carrying out what the Scottish Government has deemed an essential business.

The remedies are as follows:

1. Charge for Payment

What is it? A formal demand for payment, served by Sheriff Officers, which is an essential prerequisite to attachment (see below) and which, if not satisfied within 14 days, ordinarily would provide a basis for liquidation/bankruptcy.

Is it currently available? Sheriff Officers are currently able to serve Charges for Payment in the usual manner at business, commercial and domestic premises which are open and accessible. It is worth noting, however, that the Corporate Insolvency and Governance Act 2020, which came into force on 26 June 2020, provides that winding-up petitions presented to the court, including on the basis of an expired Charge for Payment, in the period 27 April 2020 to 31 March 2021 (extended from 31 December by regulations which came into force on 31 December 2020), will be refused by the court unless it can be shown that the debtor's business was not adversely affected by COVID-19. This will be an impossible hurdle to overcome in relation to most tenants.

2. Arrestment

What is it? A "freezing" order in respect of obligations owed by a third party to a tenant. Arrestments are frequently served on banks, freezing funds in the tenant's bank account.

Is it currently available? Sheriff Officers can serve Arrestments on banks and other third parties in the usual way.

3. Attachment

What is it? Attachment involves Sheriff Officers seizing the tenant's movable property (or, in some instances, cash on the tenant's business premises). Ultimately, property can be sold at a court-supervised auction. Cash (in any currency and including cheques and promissory notes) is released to a landlord automatically, unless there is a challenge on the basis that it does not belong to the tenant.

Is it currently available? Sheriff Officers are able to carry out Attachments at business premises which are open and accessible. Attachments can only be carried out at domestic premises in areas subject to Level 3 restrictions (or below).

4. Inhibition

What is it? Inhibition involves the service of a "schedule of inhibition" on the tenant and registration in the public Register of Inhibitions. Once registered, an inhibition operates to prevent the tenant from selling or granting further security over any heritable (freehold) or long leasehold property in its ownership in Scotland, without the prior agreement of the landlord.

Is it currently available? Sheriff Officers are able to serve and register inhibitions in the usual way.

Statutory Demand for Payment

What is it? A Statutory Demand is a formal demand (similar to a Charge for Payment above), requiring payment within 21 days. If not satisfied, it can form the basis of a winding-up petition/petition for bankruptcy against the tenant.

Is it currently available? The Corporate Insolvency and Governance Act 2020, which came into force on 26 June 2020, provides that Statutory Demands served between 1 March 2020 and 31 March 2021 will be void (in that they cannot be used as the basis for a winding-up petition). As noted above, this legislation was extended by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period No.2) Regulations 2020 which came into force on 31 December 2020 (its previous end date was 31 December 2020). There is, therefore, nothing to be gained by serving a Statutory Demand at present.

Court action

What is it? Ordinarily, regardless of whether or not a lease is registered, a landlord can recover arrears of rent and other sums via a court action for payment.

Is it currently available? Since 15 June 2020, the Scottish courts have been open again to non-urgent new civil business. Court proceedings can therefore be pursued as normal.

Irritancy/recovery of possession

What is it? A landlord can, in ordinary times, terminate a lease where the tenant is in breach of its obligations and has failed to remedy that breach within a specified time period. The threat of imminent termination is normally one of the most powerful tools at a landlord's disposal.

Is it currently available? The Coronavirus (Scotland) Act 2020 (the Act) has extended the minimum notice period for remedying monetary breaches (e.g. a failure to pay rent) from 14 days to 14 weeks (and the Act allows the Scottish Ministers to extend this period still further). This means that, whilst landlords can threaten tenants with irritancy, there will be no adverse consequence for tenants who do not pay until at least 14 weeks from the date on which they receive a "pre-irritancy warning notice". This restriction will remain in place until at least 31 March 2021 and can be extended by the Scottish Government until 30 September 2021.

For non-monetary breaches (e.g. using premises in breach of the user provision or failing to maintain), the law remains the same – termination is possible only where, in the circumstances, it is fair and reasonable for a landlord to do so (and this includes giving a tenant a reasonable period of time to remedy the breach). Clearly, the impact of COVID-19 on a tenant will factor into a court's assessment of what is fair and reasonable in the circumstances.

In addition, a landlord that has obtained a court order for removal/ejection of a tenant is now able to enforce this. Sheriff Officers are now able to serve Charges for Removing and Notices of Removal (i.e. statutory notices calling upon a tenant to remove prior to ejection) and can also carry out ejections (i.e. physically removing tenants and changing locks).

It is worth noting that the position in England & Wales (on forfeiture) is markedly different than it is in Scotland (on irritancy). In England & Wales, section 82 of the Coronavirus Act 2020 provides for a moratorium on forfeiture based on non-payment of rent between 26 March 2020 and 31 March 2021 or such later date as may be specified in any further regulations. As set out above, there is no moratorium on irritancy in Scotland.

Conclusion

Whilst the enforcement tools currently available to landlords in Scotland are more extensive than those available elsewhere in the UK, landlords will want to bear in mind local and global trading conditions. No business is immune from the effects of a global pandemic and, whilst the impact on every tenant will be different, landlords should be mindful of the longer-term effects on tenants of a short-term enforcement procedure. It is in nobody's interests to reduce the number of tenants in the marketplace and, in some cases, collaboration may be more beneficial for everyone in the longer term. This is the spirit of the UK Government's code of practice for commercial property relationships.

Whether you are a landlord or a tenant, taking bespoke advice in relation to your situation is always recommended.

Information contained in our COVID-19 articles and publications is correct at the time of print. This is, however, a constantly evolving situation across the globe and specific advice and guidance should be sought as required.

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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