Lease arrears: options for landlords in Northern Ireland

The options open to landlords in Northern Ireland differ to those in England and Wales or in Scotland. These are addressed in our separate guides.

Restrictions on statutory demands and winding-up tenants which were due to end on 30 June 2021 have been extended to 30 September 2021 under the Corporate Insolvency and Governance Act (CIGA) 2020. While restrictions on forfeiture for arrears in Northern Ireland currently expire on 30 June, these have been extended to 25 March 2022 in England and Wales and it is expected that Northern Ireland will follow suit.

This means that from 27 April 2020 to 30 September 2021, a landlord creditor cannot present a winding-up petition, unless it has reasonable grounds to believe that either coronavirus has not had a financial effect on the tenant company, or that the company was unable to pay its debts regardless of the financial effect of coronavirus.

There is also a ban on statutory demands served between 1 March 2020 and 30 September 2021 - extended from 30 June -  being used for presenting a winding-up petition on or after 27 April 2020. Whilst the legislation applies to corporate insolvency only, where a landlord's commercial tenant is a company, it is worth noting the position taken by the Northern Ireland Bankruptcy and Companies Master. Directions issued on 16 April 2021 (6-page / 101KB PDF) confirm that, due to the unprecedented challenges arising from the pandemic, the restriction on the presentation of new creditors’ bankruptcy petitions continues. This is unlikely to be removed in the short term.

As landlords now face potential arrears for all four quarters of 2020 and 2021, they are likely to want to look longer and harder at the options available to them. This is a hugely challenging time for landlords in the current economic climate, with no immediate end to the ongoing pandemic and a likely extension by the government of the restrictions on forfeiture for arrears on the horizon.

Recovery from third parties, such as current or former tenants or guarantors; recovery via rent deposits; debt proceedings against a tenant; forfeiture for non-arrears related breaches; and winding-up in certain limited circumstances, remain available to landlords in appropriate cases.

The evidence is that many landlords have reached arrangements with tenants for deferred rent payments and other concessions. The Code of Practice for Landlords and Tenants of Commercial Property was published in June 2020. Although not mandatory, the code is a useful addition to the landlord's arguments as it requires transparency from tenants on their financial position as part of any request for a concession for the landlord. This should be useful in flushing out 'can pay, won't pay' tenants.

Where a tenant refuses to provide the information required by the code, and the landlord then pursues debt proceedings, the tenant's conduct might be a factor in a costs order on a more draconian basis than would usually be the case. However, we have no evidence yet of how courts will view non-compliance with the code.

The code officially applies until 24 June 2021, but the government announced on 16 June that it intends to introduce legislation to ring-fence arrears for periods where the tenant has had to remain closed during Covid-19. Landlords and tenants will continue to be encouraged to reach an agreement in respect of Covid-19 arrears, but a new legally binding arbitration process will be introduced for cases where an agreement cannot be reached. The detail of the new legislation will emerge in the coming months, but it seems the new measures will only apply to arrears incurred by tenants forced to close during the pandemic. The government’s intention remains that tenants who can afford to pay should do so.

Debt proceedings

Debt proceedings are not the usual avenue for recovery of rent arrears. However, in light of the current restrictions on remedies, landlords may increasingly turn to debt proceedings. The reputational damage of such proceedings may be enough to encourage payment from high profile 'can pay, won't pay' tenants. In addition, the tenant will be liable for the successful landlord's costs, and it is clear that interest will be claimed on the arrears.

If the relevant lease contains an effective anti set-off provision, the tenant's defences to any claim for fixed sums such as rent, insurance premium contributions or service charge payments on account are likely to be spurious and ultimately unsuccessful. Although these claims may delay the proceedings, they will also increase the costs of the proceedings that the tenant is likely to have to pay.

The following points are worth noting in the context of debt proceedings.

Pre-proceedings

For the majority of debts, proceedings must generally be preceded by a letter before action of at least 21 days before proceedings can be issued.

The letter before action is a useful opportunity to make clear to the tenant the consequences of non-payment: interest on arrears, liability for the cost of proceedings and the prospect of enforcement of any judgment debt in the ways most likely to be of concern to tenants. This may be the point at which a 'can pay, won't pay' tenant decides to pay.

If the tenant genuinely can't pay, and the landlord is not aware of any alternative enforcement methods which might yield results, then the landlord should consider whether the cost of pursuing proceedings is appropriate. There may be a number of factors to consider here, for example reputational concerns.

Proceedings

In Northern Ireland, if the debt is for more than £30,000, the action will be commenced in the High Court of Justice. If the debt is under £30,000 and over £5,000, the action will commenced in the County Court.

Default judgment

If the tenant takes no action to defend the proceedings, the landlord will be able to apply for default judgment. This should be achievable within about six weeks of issue and service of the debt proceedings, depending on court turnaround times. Late defences by tenants are usually taken account of by the courts and will prevent a default judgment.

A tenant may seek to set a default judgment aside and defend the proceedings, or seek a stay of execution.

Summary judgment

If the debt is for more than £30,000, a tenant must, under the court rules in Northern Ireland serve a defence to the proceedings within six weeks of the statement of claim, subject to any extensions of time they successfully seek. If the defence is judged to be without merit, the landlord can apply for summary judgment. This will require a court hearing at which the landlord will need to successfully demonstrate that the defence has no real prospect of success. Summary judgment can also be applied for before the six week limit has expired if the defendant has entered an appearance and no successful grounds of defence are anticipated.

A summary judgment can be defended if a reasonable doubt about the landlord's entitlement to the debt is raised. It can also be appealed within 21 days. However, good grounds would be needed for this. A defendant who does not appear at the hearing of the application may also apply to have the judgment set aside.

An application for summary judgment can be expensive in terms of costs, depending on the nature of any grounds on which the tenant defends the claim. When judgment is granted costs follow the event of the application, however they are subject to a scale costs regime and if not agreed, to taxation, which might limit how much of the costs can be recovered. Where summary judgment is refused and the case proceeds to trial, the application costs will be paid by the party that ultimately loses the case. However, the court has discretion to make a different costs order even if the landlord wins the case, and may do so where the issues have been complex or if the landlord has acted unreasonably.

If a tenant's defence appears to be shadowy or improbable, the court can make a conditional order under which the case can continue but only if the tenant complies with conditions ordered by the court. In this scenario, a likely condition is that all or part of the arrears is paid into court. The landlord becomes a secured creditor for this sum.

Generally, it will take between three and six months from issue of the proceedings to achieve summary judgment, depending on court availability.

Enforcement methods

In the current climate, various creditors may be bringing proceedings against tenants. A search of the EJO's bankruptcy/insolvency list will provide details of these. Clearly, the earlier the landlord pursues enforcement the more likely it is to be successful.

Having obtained judgment, if the tenant does not pay the judgment debt, the landlord can seek to enforce the judgment through the  EJO. This is done by way of an application for enforcement of a judgment. The EJO will then look into the tenant's financial situation before deciding on an appropriate enforcement method. The decision as to which enforcement method is used is for the EJO. However, an application can be made to the court to have the decision reviewed and the more information the creditor landlord can provide about the tenant debtor the better.

Tenant company insolvency

If the tenant is a company and enters an insolvency process before or during any debt proceedings, this may affect the proceedings. The Bankruptcy Office in Northern Ireland is not currently accepting any bankruptcy petitions from individuals, so the following section is relevant only to tenants who are tenant companies.

Landlords may want to consider whether the proceedings themselves may push a genuinely distressed tenant into an insolvency process.

The impact of insolvency on the commencement or continuance of court proceedings will depend on the nature of the insolvency proceedings, as follows:

• administration – the statutory moratorium which applies on administration will prevent commencement or continuance of proceedings without the consent of the administrator or the leave of the court;
• compulsory liquidation – once a winding-up order is made, the court's permission is required to commence or continue proceedings;
• creditors' voluntary liquidation (CVL) – there is no moratorium preventing the commencement or continuance of proceedings but the tenant's entry into CVL means it is likely to have limited financial means to satisfy any judgment obtained against it.
• company voluntary arrangement (CVA) – there is no moratorium preventing the commencement or continuance of proceedings in these cases. This may encourage debtors to go into administration with a view to exiting the administration via a CVA, or alternatively to obtain a moratorium under CIGA – more below – while the CVA proposal is considered;
• moratorium under the 2020 Corporate Insolvency and Governance Act (CIGA) – this new form of insolvency process allows directors to trigger a moratorium period for up to 40 business days on confirming the company is or is likely to become unable to pay its debts within the moratorium period, and that the moratorium will result in the rescue of the company as a going concern. During this period, proceedings cannot be commenced or continued without the permission of the court;

Conclusion

This remains an extremely frustrating time for commercial landlords who are now directly suffering from the accruing rent arrears and uncertainty surrounding their tenant portfolios.

Whilst we know that the current situation will not last indefinitely, this knowledge provides little comfort a year on in this pandemic.

Landlords who have previously been reticent to take action against tenants may find themselves faced with no option but to now pursue debt proceedings. There are many relevant factors to consider in making that step and seeking expert advice is recommended.

Co-written by Catherine Mallon and Meghan Kirk of Pinsent Masons.