Commercial Covid rent debts – the new era

25 March 2022 was a much publicised watershed moment heralding a major change in the enforcement landscape for commercial rent arrears.  The frequently shifting rules that were in place throughout the pandemic, and which severely limited landlords options for enforcing commercial rent arrears, were once again changed last week by The Commercial Rent (Coronavirus) Act 2022 (the “Act”) which finally received Royal Assent.

The government has hailed the Act as introducing a new law to help resolve outstanding commercial rent debts by ring fencing these which arose during the pandemic.  So what are the new rules for business tenancies, and will they really resolve the remaining commercial rent debts?

What debts are caught?

It is critical for both landlords and tenants to check whether or not a particular debt is caught by the Act. In summary:

1. Protected rent debts – the Act only restricts landlords from enforcing certain “protected rent debts”. Careful consideration needs to be given as to whether a particular debt is caught, but rent, service charge, VAT and interest payable in relation to business tenancies will be.
2. Adversely affected by coronavirus – to be afforded the protection of the Act, the business tenancy has to be one that was adversely affected by coronavirus.  In broad terms, this means that the business carried on by the tenant needs to have been subject to a closure requirement or a specific coronavirus restriction.
3. Debts accrued during the protected period – the Act only protects debts which are attributable to the period between 21 March 2020 and 18 July 2021 in England (the periods are different for Welsh business tenancies and in circumstances where the closure requirements or specific restriction came to an end earlier than 18 July 2021).

Care needs to be taken to assess properly whether a debt is caught by the Act given the significant difference in enforcement options for debts inside and outside the Act.

If a debt is not caught – what next?

The general moratorium on commercial evictions (or forfeiture for non-payment of rent) ended on 24 March 2022.  We have already seen a slew of forfeitures beginning to take place by frustrated landlords taking action for arrears falling outside the protected period.  With the falling away of the moratorium, landlords’ usual remedies have returned in relation to commercial rent arrears which fall outside the scope of the Act.

The starting point is to look at rent arrears for the period of up 20 March 2020 and then the period after 17 July 2021.

If a debt is caught – what next?

The Act severely restricts action that can be taken by debts caught by the Act – a landlord cannot forfeit for non-payment, exercise commercial rent arrears recovery (or CRAR), draw down against a tenancy deposit, issue a new claim for a money judgment or enforce an existing claim in relation to a protected rent debt during the moratorium period.

However, the biggest change is the creation of a mandatory arbitration scheme for protected rent debts. Landlords and tenants now have 6 months (until 24 September 2022) to agree how to settle the debt or refer it to an arbitrator in accordance with a new arbitration process set out by the Act.  It is of course quite possible that the government will extend the 6 month period, but for now it is important to keep a close eye on this deadline.

In order to use the arbitration process, a party must be armed with a formal proposal for resolving the matter by considering appropriate relief from payment of a protected rent debt.  Unsurprisingly, the arbitrator’s principles which guide making their determination are focused on achieving a balance between (i) preserving/restoring the viability of the business of the tenant so far as that is consistent with preserving the landlord’s solvency and (ii) requiring a tenant to pay the debt in full and without delay so far as that is consistent with (i).  Arbitrators can award a reduction in the debt and/or give time to pay (with a maximum period to repay of 24 months).

With the requirement for publication of the arbitrators’ decisions enshrined in the Act, tenants in particular must weigh their options carefully before invoking the scheme.  Careful consideration should be given to the potential for unintended consequences of publication and whether this might impact the willingness of other landlords to let space to them in the future.

As we reported previously with each new legal procedure created there will be an inevitable teething process with issues that need to be teased out as the new rules are applied in practice.  Whilst the arbitration process appears as though it will provide the certainty the government is trumpeting, it does raise the question of who will be paying the price for this certainty and whether the burden will fall fairly on landlords and tenants alike.

If you are unsure of your next steps, or wish to discuss your strategy around enforcement action, please contact Joanna Osborne, Eleanor Stark or any member of our Property Litigation team.

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