Is the end in sight? COVID-19 related commercial rent debt
New law aims at resolving remaining COVID-19 related commercial rent debts
The Government yesterday announced new legislation aimed at providing a legally binding framework to resolve outstanding commercial rent debts, stemming from COVID-19. These changes continue the current trend of protecting tenants from the consequences of such debts.
To assist in negotiation of these arrears, a new Code of Practice has also been published, which it is hoped will be used by landlords and tenants to resolve their differences before the new bill comes into force in March of next year.
To whom does the new law apply?
The new Commercial Rent (Coronavirus) Bill (CRB) will only apply to debts which arose in business tenants (as defined in Part II of the Landlord and Tenant Act 1954) which were forced to close premises or cease trading in whole or in part from 21 March 2020, until the last date restrictions ended for their sector. Debts accrued at other times will not fall under the legislation and ‘restrictions’ does not include guidance and other generally applicable rules such as displaying information about wearing face masks.
Business debts which satisfy these criteria will be considered to be ‘ring-fenced’ and the associated tenancies will be ‘in scope’.
The below graph outlines the ring-fenced periods for various different industries.
What does the new law provide?
The CRB provides a legally binding arbitration service available to landlords and their tenants who are in scope, and it also expands on pre-existing restrictions on the remedies available to recover unpaid rent.
The Arbitration Service
From 25 March 2022, commercial landlords and tenants who fall within the scope of the CRB and have not reached an agreement by negotiation following the principles of the new Code of Practice (see below) will be subject to a legally binding arbitration process. Either party can apply for arbitration unilaterally after negotiation has failed and parties can continue to negotiate after arbitration has commenced. Arbitration should be considered a last resort.
The window to apply for arbitration will be 6 months from the date the CRB comes into force, with a maximum time frame to repay of 24 months.
The arbitration process is as set out below.
Modification to remedies for unpaid rent in the Bill
The pre-existing moratorium measures will continue in force until the CRB becomes law on 25 March 2022, when it will temporarily prevent certain measures to recover in relation to ring-fenced debt only. The period for which these remedies are restricted is from when the CRB comes into force until the time when final settlement by arbitration has been reached (and the time for appeals has expired) or until the time when the period for making an arbitration application has passed (6 months after 25 March 2022).
The remedies to be restricted are those which are currently unavailable under the moratorium in the Coronavirus Act 2020, along with the restrictions on winding up petitions and CRAR actions. The CRB will also prevent landlords from issuing debt proceedings for County Court Judgements and High Court Judgements whilst arbitration is ongoing or available, and they may not draw down on deposits to cover ring-fenced arrears.
The Code of Practice
As we already know, commercial tenants are protected from eviction until 25 March 2022, allowing time to negotiate arrears with landlords. The new Code of Practice (Code), released yesterday, replaces the ‘Code of Practice for commercial property relationships’, originally published on 19 June 2020 and updated in April 2021. The Code outlines processes and principles to be followed for settling outstanding debts, before the new arbitration service comes online.
Importantly, the Code grants tenants the clear expectation that landlords should waive some or all arrears if they are able to do so, and it stipulates that existing agreements which predate the Code, should continue to be honored.
Guidance for negotiation
The Code provides guidance for parties to follow when negotiating payment of rent arrears. The overriding principles are of fairness, affordability and viability.
This means that:
- an otherwise viable business should not be forced to close because of rent arrears accrued in the ring-fenced period;
- tenants should pay the rent when they can afford it;
- landlords’ solvency should be protected when negotiating rent allowances; and
- there should be a proportionate split in cost between landlords and tenants.
Where a viable tenant is seeking to deviate from the rent owed under the lease, they should demonstrate why payment is unaffordable and what level of payment may be affordable in the future. This may entail providing information about their assets and liabilities, the impact of COVID-19 on their business and other information about their financial position and expenditure. Landlords can also demonstrate what a proposed reduction of rent would mean in terms of their financials. The types of evidence envisaged by the Code are contained in Annex B.
The Code is also open for use in negotiation by tenancies that are not in scope. As a starting point, these tenants should attempt to pay the full arrears; if they cannot, however, they may attempt negotiation per the principles of the Code.
As anticipated, the new CRB and Code of Practice significantly bolster and extend tenant protections from the consequences of COVID-19 arrears. These measures are taken with a view to protecting the industry’s recovery as we move forward from the pandemic. Landlords should take some comfort from the fact that we now have an apparent end date for all restrictions on their ability to exercise their legal rights in relation to their tenancies: 6 months after the arbitration service lapses. If all goes to plan, Autumn 2022 should see a return to normality in this area.
Article co-authored by Fred Leader