Pandemic rent arrears – what comes next for commercial landlords and tenants?
Yet more pain for commercial landlords under Government plans to “ring-fence” Covid-rent arrears and introduce a binding arbitration scheme.
The current moratorium preventing landlords seeking forfeiture of leases, issuing winding-up petitions or utilising the Commercial Rent Arrears Recovery scheme in relation to Covid-based rent arrears is scheduled to come to an end on 25 March 2022. However, that is not the end of the story as landlords wanting to take action against defaulting tenants are to have their freedom to do so further curtailed.
The Government has now published the Commercial Rent (Coronavirus) Bill, together with a new Code of Practice, as a means to help commercial landlords and tenants resolve debts incurred as a result of the pandemic.
If approved, the new law will ‘ring-fence’ those debts that have arisen as a result of a business having to close during the pandemic, and for these “protected rent debts” a new binding arbitration scheme will be introduced. The new arbitration scheme may be invoked by either party where agreement cannot be reached as to how much is to be repaid and the period over which repayment will be made.
Although the Bill is currently at a draft stage, and is still subject to parliamentary approval, the Bill demonstrates the government’s intention to protect ‘viable’ businesses that were forced to close during the pandemic.
It is expected that the proposed legislation will come into force on 25 March 2022, prior to the scheduled end of the moratorium.
Which arrears are covered by the Bill?
It is thought that qualifying “protected rent debts” will include rents, service charges, insurance rents and interest which fell due under a business tenancy in the period beginning on 21 March 2020 and ending on the last day restrictions were removed from the sector in which the business operates.
Importantly, the Bill only applies to those businesses which were legally required to close during the pandemic, including leisure, hospitality and non-essential retail businesses (please see Annex A of the Code: Code of practice for commercial property relationships following the COVID-19 pandemic - GOV.UK (www.gov.uk)). Businesses such as offices and pharmacies do not appear to be included within the scope of the Bill.
In addition, the tenant must have been “adversely affected by coronavirus”. A tenant will satisfy this requirement where it has a business tenancy and was mandated to suspend trading (in whole or part) or to close its premises.
If the parties are unable to reach agreement in relation to the payment of “protected rent debts” then either party may apply, within 6 months from the date the proposed law comes into effect, for the matter to be determined by an arbitrator.
In reaching an award, the arbitrator must strike a balance between preserving / restoring the viability of the tenant’s business and protecting the landlord’s solvency. Whilst larger institutional landlords will find it hard to argue that their solvency will be impacted, smaller landlords who, for example, own just 1 or 2 commercial properties as an investment for retirement may well be able to demonstrate financial hardship if the arrears are written off or are to be repaid over too long a period.
Relief granted by the arbitrator may include writing off some or all of the arrears, allowing the tenant more time to pay (to a maximum repayment period of 24 months) and / or reducing any interest payable.
Restrictions on enforcement options
Once the new law comes into effect, all other enforcement options for arrears (including issuing a debt claim) will be stayed until either the arbitration has concluded or the 6 month period for commencing the arbitration has expired.
New debt claims can still be issued until the new law comes into effect. However, such proceedings will be stayed on the application of either party.
What can a landlord do now?
This is a good question! Landlords should think carefully before issuing a debt claim for arrears as their tenant is likely to apply for such proceedings to be stayed.
Landlords should consider whether the arrears due to them are likely to meet the criteria under the proposed new law and may wish to seek advice in this respect. Similarly, landlords may wish to seek advice now as to the balance to be struck by the arbitrator and the extent to which this may work in their favour, or not, and whether it would be better, quicker and cheaper to enter into negotiations now with its tenant in relation to the arrears.
If you require any information related to this or require assistance with any other property litigation matters, please contact Gail Morris, Partner in our Property Litigation Department.
For assistance with non-contentious landlord and tenant work including granting of leases, lease renewals and lease management contact Craig Burton, Partner in our Real Estate Department.
The draft bill can be reviewed at: newbook.book (parliament.uk)
Thank you to trainee solicitor Amrit Virdee who helped with the production of the article.
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