Julie Greig: Commercial lease obligations – where are we now?



Julie Greig

The financial impact of the coronavirus pandemic and lockdown measures was considerable. The loss of revenue suffered during the extended periods of lockdown inevitably had a significant impact on businesses. While the Job Retention Scheme (i.e. the furlough scheme) which ended on 30 September 2021 helped support employers with their wage bills, tenant’s obligations to pay sums due under a commercial lease such as rent, insurance and service charges continued. These sums remain due and payable.

A number of measures were implemented at both the Scottish and UK levels to delay or suspend the normal enforcement remedies available to a commercial landlord when faced with a non paying tenant.

We consider the ongoing impact of those measures on Scottish landlords and tenants here:

1. Irritancy

Irritancy is the early termination of the lease due to a breach of the lease – usually a monetary breach – by the tenant. It is the Scottish equivalent of forfeiture in England. In Scotland, a landlord cannot irritate a lease without first serving a “pre-irritancy notice” which formally demands payment of the outstanding sums within a prescribed minimum period. Pre-covid, the demand could be made on the giving of 14 days notice (or if the lease provides for a longer period – for the longer period). However, until 31 March 2022, that minimum period in the pre-irritancy notice has been extended to 14 weeks (with the 14 week period running from the date of service of the notice).

Therefore, landlords are unable to irritate a lease, without first allowing the tenant a period of 14 weeks to remedy the breach (i.e. the non-payment of rent).

2. Summary Diligence

Scottish leases (and any guarantees) are typically registered in the Books of Council and Session in Edinburgh. Effectively this gives the lease the status of a court decree in respect of the payment obligations (usually covering rent, insurance and service charge, the sums for which are ascertainable from the lease itself). This enables the landlord to enforce the payment obligations quickly by way of ‘summary diligence’. This can include:

  • freezing of monies in bank accounts and other debts (arrestment);
  • seizure (and ultimate sale at auction) of assets (attachment);
  • seizure of physical cash (money attachment – rarely used in practice);
  • the service of a charge for payment, the expiry of which may result in a winding up petition being presented to the court;
  • an order preventing the sale of land and buildings (inhibition – usually not an option for commercial lease enforcement because the tenant will not own land and buildings).

Landlords are not obliged to provide tenants with notice of their intention to take such steps. Summary diligence is carried out by Sheriff Officers and is relatively simple and cost-effective.

Pre-covid, summary diligence was not usually the first option of choice for landlords looking to enforce payment under commercial leases - their first port of call was often to threaten winding up, which is discussed below. However, since mid-June 2020, summary diligence in general and bank arrestments, in particular, have been the only realistic options available to landlords because of the restrictions on presenting winding up petitions at court.

Summary diligence remains an effective way to recover sums due under commercial leases, but of course is only successful against tenants who can pay but won’t pay. If the tenant genuinely can’t pay, summary diligence will likely fail.

3. Winding up or Liquidation

Under the Insolvency Act 1986, a court is entitled to wind up (liquidate) a company if it is unable to pay its debts as they fall due. A company is deemed to be unable to pay its debts in a number of circumstances which can include an unsatisfied court judgment, an expired charge for payment and an expired statutory demand. However, any credible evidence may suffice, including a failure to pay in response to an appropriately worded demand.

Pre-lockdown, the service of some form of demand with a threat of winding up was usually the first step taken by landlords to enforce payment given the significant consequences for a tenant’s business. Such a threat would in many cases result in payment (or if payment was not made, confirm that the tenant was on the brink of insolvency).

The Corporate Insolvency and Governance Act 2020 (CIGA), which applies to both England and Scotland, came into force on 26 June 2020. Between 27 April 2020 and 30 September 2021, CIGA restricted all winding up petitions unless the creditor could demonstrate that the debtor’s financial difficulties were not as a result of coronavirus. CIGA has recently been amended. The only surviving protection in relation to winding up is in respect of commercial leases; and between 1 October 2021 and 31 March 2022, a petition for winding up cannot be made in respect of rent or any sum or any other payment that a tenant is liable to pay under a commercial lease and which is unpaid by reason of a financial effect of coronavirus.

4. Statutory Demands

In circumstances where a lease is not registered in the Books of Council and Session and so where summary diligence cannot be instructed, a Statutory Demand was an inexpensive way for a landlord to seek recovery of unpaid sums. Statutory Demands are a formal written demand for payment of a debt and are often a precursor to a winding up petition. Until 30 September 2021 Statutory Demands could not be issued, however with effect from 1 October 2021 the ban has been lifted. They are however of limited use in circumstances where, currently, winding up petitions are not permitted.

5. Court action

Similarly, in circumstances where there is no registered lease, the landlord may wish to raise court proceedings for payment of arrears. There was no restriction on the raising of payment proceedings and this remains a viable option. Of course, the success of the enforcement of any court judgment obtained will depend on the tenant’s circumstances.

6. Code of Practice for commercial property relationships following the pandemic

The UK government issued a voluntary code of practice for commercial landlords in June 2020, which was updated in April 2021. A revised code of practice was then issued on 9 November 2021, together with a guide on new legislation being introduced. You can view the code of practice here. The code applies in Scotland to assist with the terms of negotiation.

There are no consequences for failing to follow the Code and we are not aware of any reported case where the courts have taken it into account. It has no legal effect on any of the enforcement options outlined above. As a result, we have seen little reference to the Code in practice.

Comment

In practice, we have seen a number of landlords and tenants reach agreements as between themselves for reduced rent and / or rent free periods sometimes in exchange for lease extensions and other concessions. Where parties have been unable to reach agreement, we have seen summary diligence instructed, with reasonable degrees of success. However, we have seen an increasing number of tenants using delaying tactics including questioning service charges with a view to avoiding or delaying payment. We also expect there to be an increase in disputed dilapidations claims where leases have ended or are approaching expiry largely due to the increased financial pressures faced by both landlords and tenants.

Julie Greig is a director at Burness Paull