Dealing with rent arrears

If you are the landlord or the tenant of a business lease under which arrears of rent have accrued during the COVID pandemic, you will no doubt be aware of the current protections for commercial tenants against eviction and the restriction on the use of Commercial Rent Arrears Recovery (CRAR).

The Government’s extension over the summer of the moratorium which has been in place since 25 March 2020 until 25 March 2022 for non-payment of any sums due under a commercial lease did not come as welcome news to landlords. The restriction on using CRAR unless there is at least 554 days unpaid rent is still in place and will also apply to 25 March 2022.

On 9 November 2021 the government published the Commercial Rent (Coronavirus) Bill to try to help deal with arrears that have accrued during the COVID pandemic, as well as an updated Code of Practice which contains the principles that should be followed by landlords and tenants in negotiating rent arrears.

The Bill proposes a new legally binding arbitration process to help landlords and tenants find proportionate resolution of COVID-19 related rent debt. The Bill applies to rent (including service charge, insurance rent and interest on those sums) that has accrued during a “ring-fenced period” from 21 March 2020 ending on different dates (the “protected period”) depending on when restrictions on trade were lifted for the relevant tenant, being 12 April 2021 for most retail tenants and 18 July 2021 for hospitality tenants. These rents will be “protected” from any action save for that pursued under the new arbitration process until either the arbitration process has completed or the deadline for referring the arrears to arbitration has passed.

County Court and High Court judgments on rent debt claims issued from 10 November 2021 are to be considered by the arbitration system. Court proceedings commenced prior to 10 November 2021 are currently not affected.

The Bill provides that the rent arrears must have accrued in whole or in part due to the mandatory closure of businesses ordered by the government. As the closure must have been mandated by the pandemic, it may mean that some tenants (such as those of office premises where working from home was recommended but not necessarily compulsory, and essential retailers, even if they actually did close down) may not benefit from the protections.

The Bill also only applies to “business premises”, which is defined by reference to Part II the Landlord and Tenant Act 1954 and will include most business tenancies but will not include licences or other lettings not caught by that Act.

Where there are ring-fenced arrears an application can be made for a binding arbitration decision. Any arbitration award must have regard to the guiding principles of the Code of Conduct, with any arbitration award to be aimed at preserving the viability of the tenant’s business, but not at the expense of the landlord’s solvency. In assessing the viability of a tenant, the arbitrator will assess:

• the assets and liabilities of the tenant (including other tenancies);
• the previous rental payments made under the business tenancy;
• the impact of coronavirus on the business of the tenant; and
• any other information relating to the financial position of the tenant that the arbitrator considers appropriate.

The landlord’s solvency is to be assessed with reference to:

• the assets and liabilities of the landlord (including other tenancies); and
• any other information relating to the financial position of the landlord that the arbitrator considers appropriate.

The assessment of the landlord and tenant cannot take into account either party borrowing money or restructuring their business.

Under the current proposals, parties will have six months from the date the Bill is enacted to apply for arbitration. Tenants will have a maximum timeframe of 24 months to repay arrears that have accrued. Any relief to be provided to the tenant (which is also time limited as to how long they will be given to pay off arrears) is to be no more than is necessary to enable the tenant to afford to pay.

The Bill is subject to Parliamentary approval and so may be amended, although the Bill is unlikely to change significantly. It is intended that the new laws introduced in the Bill will come into force from 25 March 2022. Following the introduction of the Bill into law, landlords will be prohibited from taking any action such as issuing bankruptcy petitions, CRAR or forfeiting a lease in respect of ring-fenced arrears until either the arbitration process has concluded or the deadline for referral to arbitration has elapsed.

Landlords will now need to assess what steps they choose to take regarding COVID-related rent arrears, taking into consideration the new proposals of the Commercial Rent (Coronavirus) Bill. It appears the arbitration process will override a prior court order or other proceedings instigated in relation to ring-fenced arrears after 10 November 2021 but before the Act comes into force, so moving quickly might not necessarily assist landlords.