22 December 2021

The Future of Commercial Rent Arrears

In this article Graham Halsall takes a look at draft legislation, in the form of the Commercial Rent (Coronavirus) Bill and a new Code of Practice, that is designed to tackle historic rent arrears accumulated as a result of the COVID-19 pandemic

The Commercial Rent (Coronavirus) Bill (the “Bill”) was published this month and is making its way through parliament. The primary focus of the Bill is the introduction of a new arbitration process, the purpose of which is to determine what should happen to rent arrears built up by businesses that have been forced to close or restrict their operations during the pandemic. The Bill also introduces further restrictions on enforcement action in respect of those arrears. A new Code of Practice for the regulation of commercial property relationships was also published this month, and this is intended to operate alongside the Bill. 

In this article, I take a closer look at these changes and how they are likely to impact commercial landlords and tenants as we start to emerge from the pandemic into the reconstituted world of commercial property.  

A RE-CAP

Over the course of the pandemic, a number of measures have been introduced to help preserve businesses and insulate them from commercial rent enforcement. Some of those measures have expired, but many continue to apply.

One of the principal protections that continues to apply is the moratorium on forfeiture on the grounds of rent arrears (Section 82 of the Coronavirus Act 2020). The moratorium does not apply to forfeiture on other grounds and does not prevent the landlord from commencing debt proceedings for the rent.

This moratorium also requires the Court to disregard any failure to pay rent when determining whether the landlord is entitled to oppose the grant of a new lease under Ground (b) of section 30(1) of the Landlord and Tenant Act 1954.

The moratorium is due to expire on 25 March 2022.

As well as the moratorium, there are restrictions on presenting winding-up petitions in respect of commercial rent arrears arising by reason of the financial effect of coronavirus (The Corporate Insolvency and Governance Act 2020) and restrictions on the use of commercial rent arrears recovery (CRAR) by increasing the minimum net unpaid rent that must be outstanding before it can be used. New Court procedural rules to regulate possession claims against tenants also continue to apply.  

THE ARBITRATION PROCEDURE

One of the main innovations of the Bill is the introduction of a binding arbitration procedure for parties who have been unable to reach an agreement regarding a “protected rent debt”.

A protected rent debt is one which arises under a business tenancy and if:

•  The tenancy was “adversely affected” by coronavirus; and
• The rent debt is attributable to a period of occupation from 21 March 2020 until the last day on which a “coronavirus restriction” applied to that particular business. For many businesses, this date will be 18 July 2021 (for businesses in England) and 7 August 2021 (for businesses in Wales)

A business tenancy which was “adversely affected” is one which was mandated to close, in full or in part, due to COVID-19 regulations. Therefore, not all businesses tenancies and not all rent will fall into this category of protected rent debt. An initial assessment would therefore be necessary to determine the status of the rent and the application of this new legislation. This may of itself lead to disputes between the landlord and tenant.

However, for those arrears which do qualify as protected rent debt, the Bill enables either party to unilaterally engage an arbitration process.  

Notice of Intention

The process can be initiated by either party giving notice to the other of their intention to make a reference to arbitration. This notice can be made any time within 6 months of the passage of the Act. The notice should also include a proposal for settlement of the rent arrears along with supporting evidence.

The other side then has 14 days to either accept that proposal or respond with a counterproposal of their own. During this pre-reference stage, the parties should exchange evidence of their respective positions and otherwise behave in accordance with the principles set out in the new Code.

A reference to the arbitrator can be then made 14 days after the response to the initial notice (or 28 days if there is no such response). The reference must include a formal proposal for ‘resolving the matter of relief from payment’ and the respondent may put forward their own ‘formal proposal’ in response within 14 days.

The parties will have the option to request a public hearing for the arbitration which the arbitrator will seek to conduct within 14 days, lasting not more than six hours. If no request is made, the arbitrator will consider the matter based on the documentation provided.

Tenant’s viability v Landlord’s solvency

In making its decision, the arbitrator is to have regard to two overarching core principles set out in the Bill, namely:

• that any award should be aimed at preserving or restoring and preserving the viability of the business of the tenant, so far as that is consistent with preserving the landlord’s solvency, and
• that the tenant should, so far as it is consistent with the principle set out above, be required to meet its obligations as regards the payment of protected rent in full and without delay.

The arbitrator is required under the Bill to consider the proposals put forward by the parties against the above core principles. Where only the proposal of one of the parties is consistent with the principles, the arbitrator is required to adopt that in the award. Where the proposals of both parties are consistent with the principles, the arbitrator must adopt the one it considers is most consistent.

The settlement proposals are therefore likely to be one of the most important documents in the process.

The Award

In terms of the award itself, the arbitrator has the power to reduce or write-off the debt, or give the tenant extra time to pay (of a maximum of 24 months).

The parties will be notified of the award made within 14 days of a hearing and the arbitrator’s award will be legally binding, with only very limited grounds of appeal.

The Code of Practice

The Code of Practice replaces the Code of Practice for Commercial Property Relationships During the COVID-19 Pandemic, which was first published in June 2020.

The parties are expected to adopt the provisions of the Code when it comes to negotiating settlement of the protected rent debt. The Code also provides guidance on the arbitration process, the evidence that will be considered and the principles the arbitrator will apply.  

OTHER PROTECTIONS

In addition to the arbitration procedure, the following restrictions are also introduced by the Bill:

• There is a temporary moratorium on the enforcement of protected rent debts and this restricts the landlords ability to:

1.  make a debt claim in civil proceedings;
2. use CRAR;
3. enforce a right of re-entry or forfeiture;
4. use a tenant’s deposit and apply payments against historic arrears; and
5. present winding up petitions against a company;

• Further, any debt claims issued between 10 November 2021 and the Bill coming into force will be stayed on application to the Court.

• Landlords are also unable to present bankruptcy petitions for protected rent debt where the statutory demand relied on was served (or, if an unsatisfied judgment is relied on, the claim was issued) on or after 10 November 2021. Any bankruptcy order made on or after 10 November 2021, but before the Bill comes into force in respect of protected rent debt will be void.

 COMMENT

The scheme proposed by the Bill is still in the early stages of its passage through Parliament and therefore subject to further review and possible revisions. But the objective of the Bill is clear; to provide a “simple and streamlined” process for resolving pandemic related rent arrears disputes. It is also clear that some will benefit from this legislation and others will lose out.

Landlords are likely to be frustrated that other forms of enforcement remain out of reach and disappointed that rent arrears money claims are now, effectively, off the table. This represents something of a retrograde step for landlords. On the other hand, unprotected rent debt claims could be up for grabs after 25 March 202, as many of the traditional enforcement options for that category of rent will become available at that point. With many businesses still trying to recover, and still struggling to pay rent, may tenants could be caught off guard in that respect.  

As for the arbitration process itself, this sounds good on paper, but it will be interesting to see how many people take up this approach. This is a new and therefore uncertain process, and many will be hesitant to put their claims to the test. Additionally, whether you are a tenant or a landlord, it is inevitable that you will have to reveal your financial position as part of the process and some businesses may be reluctant to do so.

With the scheme only applying to protected rent debt, you might also see rent claims carved up so that elements can be pursued outside of the remit of the scheme.

What is clear is that careful thought and planning will be needed when deciding on strategy for recovery or reduction of protected rent debt.