The moratorium extension and binding arbitration - landlords and tenants need to act

The moratorium extension and binding arbitration - landlords and tenants need to act

How will company voluntary arrangements fare in 2021?

Last Wednesday, 16 June 2021, the Government announced a fifth extension of the temporary tenant protections against landlord action for unpaid rent, which were due to lapse on 30 June 2021.  While a 9-month extension may surprise (and relieve or frustrate) many, it is not without a catch.   

The Code of Practice introduced by the Government relating to rental arrears has never been mandatory. Despite widespread good practice between landlords and tenants since March 2020, the Code has not resolved the estimated £6billion of unpaid rent. Industry bodies point to the fact that landlords everywhere have already assisted their commercial tenants to the tune of several hundred million pounds in rent concessions or other restructuring to assist those businesses. The continuing lack of any focus on the particular sectors most impacted by the pandemic, after 15 months, shows how difficult the Government has found resolving this rental debt while wishing to support businesses.

All eyes will be on the draft legislation promising to introduce ‘binding arbitration’, which parties will have to go through if agreement is not reached and ‘ring fence’ those arrears related to periods of closure. The devil as ever will be in the detail and this will be difficult and complex legislation, needing to fit wide-ranging circumstances. It seems landlords are likely to be required to share the financial pain, as well as tenants paying something. Based on the announcement, failing agreement parties will have a final decision about what rent has to be paid imposed on them.

However, there has been a notable absence throughout the Government’s responses to the COVID rent issue of any equivalent restrictions imposed on landlords’ lenders. Lenders who may initially have been supportive of their landlord/investor customers may now themselves be considering action against their defaulting landlords who have not received rental income and may be in breach of their own covenants.

With recent landlord successes in court over rental arrears, landlords may be encouraged to issue debt proceedings against their non-paying tenants to secure a judgment (although not the cash itself) for the arrears and will hope the promised legislation when introduced does not provide for a stay on those proceedings. While not such an existential threat to a business as changing the locks or a winding up petition, most businesses will not want unsatisfied judgment debts on their record for obvious reasons.

Likewise, landlords who have not yet drawn down rent deposits may now choose to, against the risk that such action might soon be prohibited. Another option still remaining for landlords is forfeiture action for breaches other than rent and this might be looked at again as another way to leverage a response from non-paying tenants, through service of the appropriate notice.

There has been a very clear message from the Government that tenants should pay rent in accordance with their lease or otherwise agreed terms with landlords where they can. With reports shortly following the announcement that landlords are considering a legal challenge to the proposed moratorium extension, a further limbo period might now follow. Tenants who have not previously made any offers to their landlords, now have an opportunity to do so, if they believe it will be better than the outcome in any ’binding arbitration’.

This article was first published in CoStar, read here

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