Update for landlords – action against commercial tenants in Scotland during COVID-19 – Lexology

COVID-19 and measures intended to address its effect have had a significant impact on the remedies available to commercial landlords, in the event of default by tenants. The position continues to evolve rapidly. This note summarises the state of play as at 19 May 2020. We will continue to update this guidance on a regular basis.

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 is not presently available to landlords in the usual way. We have summarised the current position below:

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, provides a basis for liquidation/bankruptcy.

Is it currently available? Currently, Sheriff Officers are closed to all but urgent court business, which generally would not include the enforcement of lease obligations against commercial tenants, and so this option is not currently available. We anticipate it may become available again soon.

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? Currently, Sheriff Officers are closed to all but urgent court business, which generally would not include the enforcement of lease obligations against commercial tenants, and so this option is not currently available. We anticipate it may become available again soon.

3. Attachment

What is it? Attachment involves Sheriff Officers seizing the tenant’s moveable property (or, in some instances, cash on the tenant’s business premises). Ultimately, the 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? Currently, Sheriff Officers are closed to all but urgent court business, which generally would not include the enforcement of lease obligations against commercial tenants, and so this option is not currently available. We anticipate it may become available again soon.

Court proceedings

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? The Scottish courts are closed to all business other than that deemed to be essential or urgent. Some court business is now resuming but, unless there is an imminent prescription issue (i.e. the landlord is soon to lose its right to claim because five years will have elapsed since the claim arose), it is not likely to be possible to progress an action for payment in the short term.

Irritancy/forfeiture

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”.

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.

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? It is still possible to serve a Statutory Demand on a tenant in Scotland. However, on 23 April 2020, the UK government announced that it will ban landlords and creditors from serving Statutory Demands (effective from 1 March 2020) or raising winding-up petitions (effective from 27 April 2020) against companies that cannot pay rent due to the impact of COVID-19. This restriction is to remain in place until 30 June 2020, but the government will have the right to extend it for a further period. At present, draft legislation is not available and we do not yet have clarity on whether or not the ban will be extended to Scotland. Either way, given the limited availability of the Scottish courts at present, landlords will (in the short term, at least) struggle to progress winding-up proceedings against commercial tenants.

Continue reading this atricle at https://www.lexology.com/library/detail.aspx?g=d859fe77-135f-474c-ae48-3ca25d5db9ad