Since the start of the pandemic landlords have faced a number of obstacles put in place by the government to prevent them seeking to enforce non-payment of sums due in respect of commercial tenancies. Fortunately for landlords, there is now light at the end of the tunnel.
The prohibition on the use of forfeiture and commercial rent arrears recovery (CRAR) lapses on 25 March and the blanket prohibition on winding up action against tenants under business tenancies is also due to end on 31 March 2022. So what now for tenants with large historic debts? Enter new legislation aimed at tackling the backlog of rent arrears accruing during the pandemic: The Commercial Rent (Coronavirus) Bill (the “Bill”). The Bill is expected to receive royal assent and come into effect on 25 March 2022.
What protection does the new legislation offer for tenants?
Tenants will be relieved to learn that the Bill provides ongoing (albeit more limited) protection for certain debts which accrued during periods of coronavirus-related closure. This “protected rent debt” will be ringfenced to prevent landlord enforcement action. However, this protection is much more limited in nature - “protected rent debt” is strictly limited to rents which fell due when different types of business were forced to close between 21 March 2020 and 18 July 2021 (in England) or 7 August 2021 (in Wales). A summary of all the ring-fenced periods are set out in Annex A of the Practice Code, which accompanies the new legislation; for non-essential retailers in England the relevant period ended sooner on 12 April 2021, when non-essential retail was allowed to re-open.
What does this mean for landlords?
When the Bill comes into force (expected to be 25 March 2022), there will be a new six month moratorium period preventing forfeiture, winding-up, CRAR, and drawing on rent deposits for protected rent debts only. Any ongoing debt proceedings in relation to protected rent debt can also be stayed until the arbitration has run its course.
Where commercial tenants have taken advantage of the wide ranging protections to avoid payment to date, landlords will now be able to take enforcement action in relation to debts which fell due outside the ring-fenced periods (i.e. non-protected rent debts). This means that unpaid rent for periods when businesses were permitted to open (but might have chosen not to) are now up for grabs. Any tenants who have continually failed to meet their payment obligations under commercial leases are likely to be caught short with swift enforcement action and the imminent risk of forfeiture once all the existing prohibitions fall away.
Resolving unpaid debts: the rent arbitration scheme
Where protected rent debts have fallen due for payment under a business tenancy that has been affected by coronavirus, the question of whether a tenant should be granted relief from payment will become a matter eligible for determination under a new rent arbitration scheme. The scheme is designed as a compromise between tenants who were left unable to make an income during enforced periods of closure and landlords who have faced long periods of non-payment. Either party can make a reference to the scheme within the next six months, subject to any further extension (the current deadline is 25 September 2022).
Questions remain about how many tenants will actually benefit from the arbitration scheme, however. As the scheme will only apply to businesses that were legally forced to close, as opposed those following guidance to ‘work from home’, those in the hospitality, leisure and retail sectors are likely to be the ones who benefit the most. Parties are also encouraged to enter into their own negotiations on making a referral, the expectation being that the landlord will share the burden, for example by reducing rent or granting further time to pay.
What is the arbitrator’s role?
Assuming the matter is eligible for referral, the arbitrator’s role is to assess, firstly, whether the tenant’s business remains viable (or would be viable if given relief under the scheme) and, secondly, whether the tenant should be granted relief from payment with reference to the solvency of the landlord and the tenant’s ability to pay. The government has issued draft statutory guidance to arbitrators, which is intended to assist arbitrators in the exercise of their duties. It is clear that no award should be made where the underlying business of the tenant is not considered viable. In the case of a landlord whose tenant has continually failed to pay rent falling due post-lockdown, it is likely that the business will not be considered viable as a going concern, in which case no relief would be granted.
What about existing rent concession agreements?
In circumstances where a rent concession has already been agreed, the debt will not be eligible for referral to the rent arbitration process. There is no definition of an “agreement” within the Bill, so depending on how well parties documented the agreement, disputes may arise where one party seeks to argue their way out of an agreement where they expect a better return under the new arbitration scheme.
This article was first published on Property Investor News and can be accessed here.
Stephanie Newton
Lucy Trott