Commercial Rent Arrears: Update

Throughout the Coronavirus pandemic, there has been a moratorium in place which prevents landlords from (i) forfeiting leases for non-payment of rent, (ii) presenting winding-up petitions for non-payment of rent and (iii) utilising the Commercial Rent Arrears Recovery mechanism. This has left landlords in a difficult position and with many tenants accruing large rent arrears. As a result, many have been forced to draw from the tenant’s rent deposit or issue proceedings to recover these arrears.  In June 2021 the Government extended the moratorium until 25 March 2022.

Whilst the ending of the moratorium is likely to raise the hopes of landlords owed rent, the Government is keen to ensure that landlords’ actions are proportionate and that any further disruption to the economy is minimised. Therefore, it is expected that certain rent arrears will be ring-fenced and a binding arbitration scheme will be introduced by the Commercial Rent (Coronavirus) Bill (“the Bill”) which will receive Royal Assent on 25 March 2022. Our previous articles cover the key takeaways from the Bill and can be read here and here.

It is now less than a month until this new arbitration scheme comes into effect and so it is important to consider which rent arrears are likely to fall within the scheme and the implications if they do.

What is caught by the Bill?

The Bill is to encompass “Protected Rent Debts”. These are defined as the rents reserved under a commercial lease (including service charge, insurance rent, VAT and interest), which fell due between 21 March 2020 and 18 July 2021, but only where the premises were mandated to close or cease trading in whole or in part as a result of the Coronavirus restrictions.

This definition is important, as the Bill does not cover rent arrears accruing before 21 March 2020 or after 18 July 2021, nor does it cover businesses which were not forced to close by the Government (including offices and pharmacies). It is therefore important to consider the nature of each tenant’s business and the periods during which there were restrictions in place for each type of business.  Landlords in cases where there were no restrictions on a tenant’s business will be able to take advantage of the usual remedies, such as forfeiture for non-payment. It is important to note that this includes rent arrears after 18 July 2021, even if the rent arrears include some Protected Rent Debts.

Caught by the Bill – what now?

If you are caught by the Bill, the resolution of the protected rent debts must be solved by mutual agreement or arbitration. In addition to this, any debt claims already at Court made between 10 November 2021 and 25 March 2022 can be stayed on an application made by either party.

The Bill provides that either party will have six months to apply for statutory arbitration, and the process will then follow the strict timelines and procedures set out in the new Code of Practice for Commercial Property Relationships following the Covid-19 Pandemic. The arbitrator will make the award with reference to the principles within the Code of Practice, in particular the aim to preserve viable businesses and consider the affordability of the tenant to ensure both the landlords and tenant’s solvency is considered.

The arbitrator has the power to make whatever award they consider appropriate, and the award can allow the tenant to spread payments over a period up to 2 years from the date of the award. This could of course leave landlords waiting considerable periods for payment whilst they are out of pocket. In addition to this, landlords are prohibited from deducting any arrears constituting a Protected Rent Debt between the date the Bill is passed and the conclusion of the arbitration. If a landlord has already deducted arrears comprising a Protected Rent Debt from a rent deposit, tenants do not have to top this deposit up until the conclusion of arbitration.

Tenants do also have to be aware that the arbitration awards are likely to be published, which could have unintended consequences in the future, not limited to difficulties in taking on new leases.  Clearly this does mean that ongoing discussions to reach a mutual agreement are likely to be preferable to a reference to arbitration.

As the Bill moves forwards after receiving Royal Assent, we look forward to seeing how the arbitration scheme will work in practice. As with any new legal procedure, there will be issues to tease out, including how successful this process is for allaying landlord’s concerns. Legal advice should be taken for any party unsure of the correct steps to take.

Should you have any concerns or wish to discuss your strategy ahead of the Bill, please contact Joanna Osborne or any member of our Property Litigation team.

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