The current legislation, particularly the Coronavirus (Scotland) Act 2020; Coronavirus (No 2) (Scotland) Act 2020 and the Corporate Insolvency and Governance Act 2020, contain measures to protect debtors affected by Covid-19.
These measures restrict the options available to landlords and creditors and have been extended to remain in force until 30 September 2021, although some measures will cease on 30 June pending subject to any further extension which may be granted.
The minimum notice period (in respect of non-payment) has been extended to 14 weeks instead of the usual 14 days. Landlords can still threaten tenants with irritancy but cannot take any steps to actually terminate a lease until 14 weeks has passed from the date on which they receive a "pre-irritancy warning notice". Except for the extension to 14 weeks there is presently no moratorium on irritancy in Scotland.
There is no change to the provisions on non-monetary breaches – termination is still possible where, in the circumstances, it is "fair and reasonable" for the landlord to irritate. The pandemic will likely be a relevant factor in relation to the court's view of what is "fair and reasonable" but there is no strict definition of this term; it is very much dependent on the circumstances.
If a landlord has obtained a court order for removal/ejection of a tenant, they are now able to enforce this. Sheriff Officers can serve Charges for Removing and Notices of Removal and can then carry out the eviction if required. As in normal circumstances this may involve taking possession of the property by gaining access via force and changing locks.
However, given the reduced demand for commercial property (in particular office, retail and hospitality space) due to the pandemic, in many cases, landlords will not wish to terminate commercial leases and retake possession (as this may trigger business rates liabilities).
The Temporary Legislation
A landlord must still give a tenant notice before they commence legal proceedings for eviction. Six months' notice must currently be given to end a tenancy unless the reason for eviction is one of the following, in which case only 28 days' notice is required:
- the tenant has a criminal conviction;
- the tenant has engaged in relevant antisocial behaviour;
- an associate of the tenant who spends time in the rented property has a relevant criminal conviction or has engaged in relevant antisocial behaviour; or
- the tenant is no longer living in the property.
Grounds of Eviction
The grounds for eviction are ordinarily a mix of discretionary and compulsory grounds. The temporary legislation makes all grounds for eviction in the private rented sector discretionary. The Tribunal can therefore consider all relevant factors, including the impact of the pandemic, when determining whether to issue an eviction order.
In normal circumstances landlords can begin eviction proceedings if there are rental arrears. The temporary legislation confers further obligations on landlords before they can evict on the basis of rental arrears provided that at least some of the arrears accrued after 27 May 2020. The landlord must:
- send the tenant clear information setting out the terms of the tenancy agreement, the level of arrears, the amount of rental arrears, and the legal options available to both landlord and tenant;
- make reasonable efforts to agree a repayment plan with the tenant; and
- give reasonable consideration to the tenant's circumstances and attempts to make repayments and comply with their obligations in terms of the lease.
The landlord must record in writing the steps taken to comply with these steps. The Tribunal will consider this evidence to decide if the landlord acted reasonably and if an eviction order can be granted in the circumstances.
From 22 January 2021 Sheriff Officers cannot attend a dwelling house for the purposes of serving a charge for removing or carrying out evictions. The restrictions apply in tier 3 and tier 4 areas only. The regulations carve out certain exemptions for evictions arising as a result of antisocial behaviour.
If a lease contains a clause consenting to "registration for preservation and execution" and it has been registered in the Books of Council and Session the extract lease can be used to carry out diligence against the debtor without court proceedings being raised first. The financial obligation must be either expressly set out in the lease itself or the mechanism for identifying the financial obligation must be ascertainable.
Due to social-distancing restrictions Sheriff Officers were, at the outset of the pandemic, unable to carry out summary diligence. These restrictions have since been lifted and so this option remains available to creditors.
Charge for Payment/Statutory Demands
A Charge for Payment tends to be the first-choice option for most creditors as it is a pre-requisite for most other forms of diligence. Sheriff Officers serve a formal written demand for payment on the debtor and they have 14 days from the date of service to make payment. In the event of a failure to pay the creditor can take other steps to recover the sums due.
Charges for Payment can still be served, albeit a winding up petition can only be presented if you can show that the failure to pay would have arisen notwithstanding any effect of Covid-19. Unless the debt is a historic one it will be very hard for a creditor to argue that the pandemic is not the reason for the unpaid debt.
The restriction in relation to Statutory Demands is even broader. A winding up petition cannot proceed on the back of an expired statutory demand in any circumstances if it is served between 1 March 2020 and, at present, 31 March 2021. Accordingly, on the basis that a Statutory Demand cannot be used to then commence winding up proceedings there is generally little purpose in serving one at present.
A bank arrestment is the most common form of arrestment and is used to secure monies held in a debtor's bank account. They can still be instructed and there is no change to the process or the minimum protected balance which cannot be recovered by creditors.
Following the expiry of a Charge for Payment it is possible to seek to "attach" goods or equipment which belong to a debtor. This is a particularly common means of diligence for commercial landlords who may wish to recover goods held in the tenant's premises. This option remains available to creditors however an attachment can only be carried out in premises which are "open and accessible" which would apply to those mainly in tier 3 or lower.
If a debtor owns a property in Scotland an inhibition can be registered against the debtor, whether an individual or a corporate entity, in order to prevent them transferring the property to a third party or granting a security over it. The property cannot be disposed of until the creditor agrees to discharge the inhibition following payment. Although not likely to result in repayment until the property is sold this provides important protection for creditors and the current legislation does not affect a creditor's ability to register an inhibition.
The Corporate Insolvency and Governance Act 2020 restricts the use of statutory demands and winding up petitions. It also introduces a permanent change in the form of a new insolvency process known as a Moratorium. The Moratorium is a director-led process that provides a 20 day protection period to companies from their creditors. An Insolvency Practitioner is appointed to "monitor" events during this process which can be extended for an additional 20 day period if necessary.
A winding up petition can currently only be presented if the Petitioner can show the court that the debt has not in any way been accrued as a result of Covid-19. As the burden is on the Petitioner to show this it is likely that there will be little prospect of success in the majority of circumstances and so the liquidation of companies has to all intents and purposes ceased since the Corporate Insolvency and Governance Act 2020 commenced. These provisions are due to remain in place until 30 June 2021 but there is scope for a further extension if this is deemed necessary.
The level of debt required for a creditor to raise sequestration proceedings has been increased from £3,000 to £10,000. The usual moratorium period which can be applied for and which protects a debtor from a petition for sequestration being lodged has been extended from 6 weeks to 6 months. There is also currently no limitation on multiple applications for this moratorium during any 12-month period.
The Accountant in Bankruptcy has ceased any property sales and evictions and has encouraged other Trustees to do the same, albeit there is no obligation on them to do so and so the sale of a debtor's property by their Trustee is still competent.