During the pandemic, many businesses were required to close and send their staff home. As a result, some tenants were unable or even unwilling to pay their rents to their landlords. This has resulted in enormous levels of debt claims arising, some of which have been settled by Court proceedings, but many remain unresolved.
Earlier this year, the government indicated that it would introduce legislation which provides for an arbitration process to be used by parties to resolve their disputes about commercial rent arrears. Draft legislation has recently been published in the form of the Commercial Rent (Coronavirus) Bill, which is currently passing through the House of Commons. The government’s aim is for the legislation to become law by 25 March 2022.
In addition, the government has recently published an updated ‘Code of Practice for Commercial Property Relationships following the Covid-19 pandemic’. It provides a useful explanation of the proposed Bill and the behaviours which the parties to rent arrears disputes are expected to adopt when seeking to resolve their differences.
Until the Bill becomes an Act of Parliament, it is not law and, therefore, changes may be made to the proposed legislation between now and that time. By way of a brief overview of what to expect, some of the key points to note from the draft legislation are set out below:
- The arbitration process is expected to only be available to certain types of businesses which have accrued rent arrears during the period commencing 21 March 2020 until the date that restrictions on the closure of the whole or part of the business in question were lifted, with the latest date for premises in England being the 18 July 2021 and 7 August 2021 for those in Wales. Annex A to the updated Code of Practice lists the periods for which the rent arrears will be ring fenced for specific business sectors
- ‘Rent arrears’ are expected to include not only the annual rent but service charge, insurance rent, VAT, and interest
- Either the landlord or tenant will be able to refer the dispute to an arbitrator during a period of six months beginning with the time the Bill becomes law. That period could, however, be extended by the Secretary of State
- The arbitrator's powers will be quite broad and include the authority to write off all or some the rent arrears or give the tenant time to pay over a period of no more than 24 months. There are, however, two key principles which the arbitrators are going to have to bear in mind when making their award:
- first, the aim of any award is to try to preserve or restore and preserve the viability of the tenant's business when deciding what relief should be granted to the tenant, but that is not to come at the expense of the landlord's own solvency and
- secondly, a tenant who can pay will be required to pay and will not get relief other than being given time to pay where necessary in order to make the debt affordable
- The draft Bill proposes to bring in some restrictions in respect of landlords’ enforcement remedies for recovering the ring fenced arrears. For example, landlords will not be able to pursue the tenant for a prescribed period set out in the Act using remedies such as forfeiture, court proceedings, commercial rent arrears recovery, use of the tenant's deposit and certain insolvency proceedings. These specific restrictions will only apply to rent arrears which qualify for consideration by an arbitrator under the new law
Reviving the remedy of forfeiture?
Based on the draft Commercial Rent (Coronavirus) Bill, there will be some landlords and tenants who will not be able to make use of the new arbitration process.
The Coronavirus Act 2020 restricted landlords from being able to forfeit for unpaid rent of commercial leases. Save where the arrears will be ring fenced (and therefore caught by the restrictions on enforcement remedies proposed in the Commercial Rent (Coronavirus) Bill), the restriction on exercising the remedy of forfeiture is due to be lifted on 25 March 2022.
Whether or not we will see a rush by landlords to forfeit commercial leases remains to be seen. Much will depend on whether that is the best commercial decision for the landlord in question. Will they want to be saddled with an empty property and potential business rates liability if the chances of finding a new tenant do not look promising? These are not new considerations; they applied pre-pandemic but the effects of the pandemic on businesses will no doubt mean that some landlords will be grateful just to have a tenant, particularly in the retail sector.
Are landlords likely to have waived the remedy of forfeiture during the time that the remedy was restricted?
This seems unlikely because, fortunately for landlords, the Coronavirus Act 2020 provided a safety net whereby a landlord's conduct and conduct on its behalf could not amount to waiver of the remedy of forfeiture during the restricted period, save where the landlord expressly waived the remedy in writing. However, we may well see some tenants seeking to argue that certain correspondence with their landlord should be construed as an express waiver.
An important point for landlords and their agents to bear in mind once the restriction on forfeiture is lifted next year is that the safety net concerning waiver will also disappear. Landlords and agents, therefore, need to be on their guard and remember all the usual steps and procedures they had in place pre-pandemic which were designed to avoid accidentally waiving the remedy of the right to forfeit.
Read our other predictions for 2022