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COVID-19 Guidance Note: what does is mean for real estate in Scotland?

03 April 2020
Real Estate Sector
Our team assess the impact of the Coronavirus (Scotland) Act 2020 and issues for landlord and tenants in Scotland against the background of many tenants ceasing  to continue rent payments following compulsory closure of shops and other business on account of COVID-19.

IRRITANCY – CORONAVIRUS (SCOTLAND) ACT 2020

The Coronavirus (Scotland) Bill 2020 has been passed by the Scottish Parliament and is expected to come into force next week. The Bill can be seen here.

Under this Act the notice period for irritancy for non-payment of rent, the Scottish equivalent of forfeiture, has been extended from 14 days to 14 weeks. Points to note here are as follows:

  • The 14 week period applies irrespective of whether a notice has been served;
  • Any notice served before the Act comes into force is void if the notice period in the notice has not yet expired; 
  • The notice period can be amended  by the Scottish Ministers;
  • The protections apply to all commercial tenants, irrespective of size and strength;
  • The protections apply to any payments due under the relevant lease so the extended period applies to service charge, reimbursement of insurance premiums etc;
  • It does not matter whether the tenant is able to pay or not;
  • Unpaid rents are still owed and due on the relevant rent payment dates, it is just  irritancy enforcement action that is delayed;
  • The measures of the Act will apply until 30 September 2020, although the Scottish Ministers may by regulations (i) provide for them to continue until 31 March 2021, and thereafter again to 30 September 2021 and (ii) provide for them to expire earlier.

Irritancy is not always an attractive option in "normal" circumstances as it leaves landlords with an empty unit and rates liability. 

OTHER LANDLORD'S REMEDIES FOR NON PAYMENT OF RENT

Court Proceedings for Payment

At present, access to the Courts is restricted. The Court of Session is only dealing with "essential business". All bar 10 of Scotland's Sheriff Courts are closed. The remaining 10 are only dealing with "emergency" civil applications. Essential and emergency business includes urgent adoption, child protection and child abduction matters, as well as applications for interim interdict. The Courts will also hear other urgent cases on cause shown. It is, however, unlikely that a standard debt recovery action for non-payment of rent, etc will fall into the "essential business" category and the onus will lie on a Landlord to demonstrate why their action should be heard above all others. Many Landlords will find themselves unable to actively progress their actions through Court for the time being.

Diligence

If a Lease is registered in the Books of Council and Session for preservation and execution, the Landlord can, without recourse to the Court, instigate diligence against the Tenant for non-payment of rent (this is known as summary diligence). If the Lease does not provide for registration, the Landlord will need to obtain a Court order before it can proceed with diligence. The Court order can be (i) a decree for payment (diligence in execution);  or alternatively, (ii)  an interim order which can a Landlord can apply for at any stage whilst their action is live in Court (known as diligence on the dependence). Common diligence options include:

  • Arrestment of Bank Accounts: An arrestment is used to freeze money held in the Tenant's bank account. The maximum sum that a Landlord can freeze is the amount of the debt plus the cost of serving the arrestment.  If there are no funds in the relevant account at the time the arrestment is served then nothing is frozen. If funds are frozen, the bank will write to the creditor to let them know how much has been frozen. In most instances, if the dispute is not resolved within 14 weeks after the arrestment is served, the frozen funds are released to the Landlord. The rules for diligence on the dependence are, however, slightly different and the 14 week period does not commence until a decree for payment is granted.
  • Attachment of Stock/Assets: A Landlord must serve a Charge for Payment before proceeding with this option. Attachment is the means by which a Landlord attaches assets belonging to the Tenant, such as stock. A value is attributed to each of the attached assets and the Tenant has a period of 14 days to effectively buy back the assets. If the Tenant fails to do so, the goods can be sold at auction and the proceeds used to pay the Tenant's debt to the Landlord. 

In the current climate, a Landlord may hit a practical hurdle in enforcing diligence: diligence must be carried out by Sheriff Officers (Bailiffs). At present, Sheriff Officers are operating on a limited basis & we understand that they are only serving time critical instructions, such as interdicts. Whilst a Landlord might be entitled to proceed with diligence, practically doing so will be a challenge. 

Demands for Payment and Statutory Demands 

A Statutory Demand is a formal demand for payment. If the Tenant company is registered in Scotland, the Statutory Demand  must be in the prescribed form and must be left at the Tenant's registered office. If the Tenant company is registered in England and Wales, the Landlord should be careful to ensure that it follows the process for service of a Statutory Demand in England (that process is beyond the scope of this article). If, after 21 days the Tenant has failed to make payment of the debt and/or disputes that the debt is due then the Landlord may make an application to the Court for the Tenant Company to be wound up (i.e. have a liquidator appointed). A Demand for Payment is similar to a Statutory Demand but there is no prescribed form for a Demand for Payment and no prescribed period for payment (it is common to see periods of anything from 4-14 days). Again, if the Tenant does not make payment of the debt and/or dispute the debt is due then the Landlord may seek to proceed with an application to appoint a liquidator on the basis that the Tenant company is unable to pay its debts as they fall due. 

It is common place for Statutory Demands and Demands for Payment to be served by Sheriff Officers so again, practically, it is likely that a Landlord will experience difficulty in instigating these options. 

Winding Up (Liquidation)

If a Landlord serves a Statutory Demand or Demand Letter against a Scottish registered Tenant, and the period specified in the notice expires without payment being made and/or the debt being disputed, the Landlord may seek to have a Liquidator appointed to the Tenant company. This process is, however, done via a petition application to the Court. The Court of Session can hear petitions relating to any Scottish registered companies. Where the issued share capital of the Tenant company is less than £120,000 the Sheriff Court in the Sheriffdom in which the Tenant company has its registered office also has jurisdiction to hear a petition for liquidation. As liquidation petitions have not been classed as essential court business, it is likely that the progress of the application will be delayed. If the Tenant wishes to be forewarned about any pending applications to appoint a Liquidator, it should consider lodging Caveats at Court. When the Court process the Landlord's application, the Caveat will be triggered and the Tenant's solicitor will be informed that an application to appoint a liquidator has been received, albeit there is likely to be a delay before the Court consider the application. The Scottish Court Service has confirmed that caveats can now be registered electronically and that existing Caveats will be honoured. 

If the Landlord does not have another tenant lined up to take the property, it is unlikely that winding up will be an attractive option for a Landlord because the Landlord will rank as a creditor in the Liquidation and does not necessarily result in the Landlord receiving payment of the sums due.

OTHER RISKS OF WITHHOLDING RENT:

There are various other potential consequences and risks for tenants associated with withholding rent.  Parties should consider:

  • Rental concessions – monthly payments, direct debit exemptions and the like are usually linked to trading and continued payment of rent so these concessions could fall;
  • Rent deposits –these could be forfeited to settle the arrears and, if the rent deposit deed provides , a further deposit may require to be paid;
  • Break options –These are often conditional on payment of rent and other sums being up to date at the break date.  Non-payment could mean that the break is lost;
  • Guarantees - Guarantors can still be pursued, although as noted above there are currently practical difficulties in taking enforcement action, and no doubt consequent backlogs once all court process and procedures are back up and running;
  • Interest – penal interest will run on any sums due under (and in terms of) the lease that remain unpaid, although this usually requires that the Landlord issue a demand for payment in the first place.

Any business who will struggle to pay rent during this period should take the opportunity to talk to their landlord. The Landlord may be agreeable to  defer or waive payments during this time, should the tenant and landlord have the discussion.

Further, as many landlords will now benefit from a mortgage moratorium, there may be an opportunity for parties to negotiate new or alternative terms  which are more appropriate in light of the altered circumstances.  This will however depend on factors such as the bargaining power each party holds, the actual value of the rent, the remainder of the term, reputational issues for   the landlord and the occupier and the costs of possible litigation should no agreement be reached.

Such discussion is consistent with the intention of the Coronavirus (Scotland) Act 2020 which is to afford commercial landlords and tenants valuable breathing space to resolve for themselves appropriate solutions to address the unprecedented challenges presented by the Covid 19 outbreak.

Further Reading

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