Covid rent debts: what now for landlords and tenants?

Since the start of the pandemic the government has imposed a moratorium on the usual remedies available to landlords to enforce payment of commercial rent. The existing measures include a prohibition on the use of forfeiture and commercial rent arrears recovery (CRAR) until 25 March and a prohibition on winding up against non-paying tenants until 31 March 2022. However, in June last year, it was also announced that the government would publish legislation with the aim of tackling the backlog of rent arrears that had accrued during that period. In tandem it also launched a new Code of Practice to be used by landlords and tenants to resolve disputes over arrears. So what does the Bill involve?

Ring-fencing of "protected rent debt"

The Commercial Rent (Coronavirus) Bill (the “Bill”) ring-fences debt that accrued during periods of coronavirus-related closure and business restrictions – known as “protected rent debt”. “Protected rent debt” is limited to rents which fell due 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 Code; for non-essential retailers in England the relevant period ended sooner on 12 April 2021, when non-essential retail was allowed to re-open. The ring-fencing of protected rent debt affords more targeted protection for tenants which is narrower in scope than the previous prohibition on enforcement (relating to commercial rent arrears more generally) and closely tied to periods when different types of business were forced to close.

Rent arbitration scheme

The Bill also sets out a binding rent arbitration scheme to determine the amount payable by tenants with protected rent debt. Reference to the scheme can be made by either party at any time within six months of the Bill coming into effect (expected 25 March); the parties therefore have until 25 September 2022 to make a reference for arbitration, subject to any further extension.

However, the scheme does not benefit everyone equally. It is thought only a third of businesses impacted by COVID-19 will be ‘in scope’ to use the arbitration scheme to resolve ongoing disputes. It is clear from the scheme that where tenants can pay, they should pay, and where they can’t pay, they are expected to negotiate with the landlords in the expectation that the landlord will share the burden, for example by reducing rent or granting further time to pay. The protection afforded by the scheme will only bite where businesses were legally forced to close, as opposed to offices who followed the guidance to ‘work from home’. So for example, if a tenant has a number of retail premises and a head office, whilst the retail leases will qualify for the scheme, the office lease won’t. Consequently, those in the hospitality, leisure and retail sectors, who arguably suffered most during the pandemic, are likely to benefit the most. 

Viability of tenant business

The arbitrator’s award following a referral under the scheme will be aimed at preserving the viability of the business of the tenant, while preserving the solvency of the landlord. However, the Bill is clear that no award should be made where the underlying business of the tenant is not considered viable. Using our example above, where a tenant business has continually failed to pay rent falling due post-lockdown, that may be an indicator that the business is not viable as a going concern, in which case it would not be appropriate for an award to be made.

What about existing rent concession agreements?

As currently drafted, any rent concessions already agreed between landlords and tenants will fall outside of the scope of the Bill and would not be bound by the arbitration process. Unfortunately, the legislation has not defined what an “agreement” is, so depending on how well parties documented the agreement, there could be scope for either party to try and argue either that there was no final agreement or any such agreement isn’t enforceable and a decision on how much rent should be paid could be referred to the arbitration scheme.

Moratorium on enforcement action

When the Bill comes into force (expected to be 25 March 2022), there will be a six month moratorium period preventing forfeiture, winding-up, CRAR, and drawing on rent deposits for protected rent debts only. Any debt proceedings can also be stayed until the arbitration has run its course. 

However, for all other overdue commercial rent, landlords will be permitted to enforce using their usual remedies for non-protected rent arrears once the existing prohibition lapses. By way of example, although landlords are currently unable to take action for unpaid commercial rent falling due now, once the new Bill is in force there will be nothing to prevent them from pursuing forfeiture, CRAR, winding up or drawing down on rent deposits for such rents (which fall outside its scope).  

This article was first published in React News and can be read online here.