The new Commercial Rent Arrears bill - not the end to landlords’ woes

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The Commercial Rent (Coronavirus) Bill finally received Royal Assent on 24 March 2022 and has established a legally-binding arbitration process for landlords and tenants to settle certain outstanding debts arising from the national lockdown period between 21 March 2020 and 18 July 2021.

What is the bill?

The bill has been introduced to coincide with the end of multiple restrictions that have been placed on landlords since late March 2020 – preventing them from recovering pandemic-induced rent arrears from their tenants.

It aims to encourage collaboration, keep disputes out of court, and avoid the time and costs of litigation.

For rent debts to be considered for the arbitration process, they must be attributable to 21 March 2020 and 18 July 2021, and the tenant must have been mandated to close by reason of coronavirus during that period.

Any rent debts outside of these dates won’t be subject to such restrictions which means landlords can sue and forfeit leases for rent arrears incurred by tenants who weren’t forced to close during Covid – such as essential retail and pharmacies.

Some sectors – such as non-essential retail and hospitality – were able to reopen before the above stated period due to restrictions being lifted. It is important to bear in mind that rent debts will not apply to those certain time periods for these industries.

The arbitration process

Either landlords or tenants can start the arbitration process. Currently, they have a six-month period from now to refer these protected debts to arbitration.

There are three stages of the process:

Pre-arbitration, which must be commenced within six months of 25 March, although this is likely to be kept under review. Prior to a referral, either the landlord or tenant needs to notify the other party of their intention of doing so.

Within 14 days of receiving this notification, the other party can respond, which will then allow for another 14 days before the formal referral can be made. As the process is currently only for six months, the pre-notification period should be started no later than five months in to allow for this period.

After this, the arbitrator must determine whether the criteria for the process has been met. This includes checking whether the tenant was adversely affected by COVID, if the tenant’s business is viable or would be viable if given relief, whether the debt relates to the protected period.

The arbitrator will then consider what relief should be granted to relation to the owed debts. They will determine how much the tenant can afford to pay and how quickly, as well as take the landlord’s position into consideration and whether any relief will jeopardise their solvency.

Any award the arbitrator makes has a payment deadline of 24 months from the day the decision is handed down.

How will this bill affect landlord and tenants?

The criteria for arbitrators to consider when making their decisions seems, for tenants, to be quite flexible in terms of assessment of their viability, whereas for landlords, these are pretty limited. The act says in assessing the solvency of landlords, the arbitrator must have regard to their assets and liabilities, including any other tenancies to which they are party, and any other information relating to the financial position of the landlord the arbitrator considers appropriate.

While the analysis of assets and liabilities might be familiar territory for landlords and their advisers, the reality is that the bill offers limited protections for landlords in this regard. The bill would appear to simply wish to avoid tipping landlords into insolvency by granting concessions to tenants, rather than positively seeking to improve the position of landlords.

However, it is important to remember that some landlords may be suffering considerably as a result of Covid and unpaid rent, leaving them unable to meet their loan repayments or pay their staff for example.

Within the jurisdiction granted, we would expect arbitrators to not only look at tenants’ viability in isolation and make sure they are seriously considering landlords’ positions during the process to ensure they are not being adversely affected.”

Considerations

Two major cases – brought by BNY Mellon and the London Trocadero – in relation to pandemic-induced rental arrears are currently making their way through the courts, with a decision in the Court of Appeal expected in June 2022.

Should these cases succeed, there is the potential for relevant rent arrears not to qualify as protected debts. And if there is no protected rent debt, arbitrators must dismiss any such referrals.

This means many tenants may not have a strong incentive to refer cases to the arbitration process immediately. Some may hold off doing so until those decisions have been made so an arbitrator doesn’t order them to pay something when they may end up having to pay nothing.

Given the uncertainties and the background, references to an arbitrator may get off to a slow start.

Preparing now

The introduction of this new arbitration legislation will play a crucial part in continuing to help landlords and tenants resolve outstanding rent arrears.

The key thing for landlords is to carry out an analysis of the arrears they are owed – look at the periods they relate to and check whether tenants qualify. Then, speak to a professional to work out what action can be taken in relation to both protected and unprotected debts.

It is also strongly advised that commercial landlords seek early legal advice on their position and strategy to maximise recovery. Advice may also be required throughout the negotiation process.  This can be important in continuing to protect their capital value and maintain bank interest covenants.

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James works with clients and colleagues to find effective solutions to property disputes and problems.

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Guides & Advice

Your Guide to Commercial Landlord and Tenant Dispute Resolution

Helping commercial landlords and tenants resolve rental disputes following the COVID-19 pandemic.

Introduction

Over the past 15 months, since March 2020, commercial rent arrears have increased to unprecedented levels in the UK. And, with Government restrictions still being applied to some of the usual remedies to recover rent arrears for commercial landlords, it’s all the more important for landlord and tenant disputes to be settled quickly, through negotiated agreements for the future.

Recent announcements have indicated that new legislation is likely to be published in the coming months, which could force landlords and their tenants into binding arbitration rather than going to Court. This will impact any arrears discussions and potentially put landlord and tenant relationships and enterprises at risk.

Given this situation, our expert team of property litigation and debt recovery specialists will work with both parties to try and achieve mutually beneficial agreements and will provide support during these negotiations. As such, we’ve put together this useful guide to give you all the information you need as a commercial landlord or tenant, to help you take the necessary steps to avoid further financial complications and build a lasting relationship that protects both of your enterprises.
 

The current situation

The Coronavirus Act 2020 initially gave a three-month moratorium on forfeiture of lease due to rent arrears in respect of commercial property in England, Wales and Northern Ireland. This was due to expire on 30 June 2021, but following the Government’s announcement on 16 June, this has now been extended to 25 March 2022. The current moratorium on action by landlords to recover rent arrears via bailiff action under the CRAR process has been similarly extended. These extensions mean commercial landlords are now faced with further delays in rent collection for arrears accrued during periods of enforced closure during the pandemic.

It’s important to note that the moratorium does not excuse tenants from paying their rent during the pandemic. All commercial tenants remain liable for payments due since March 2020.

So far, many commercial landlords have been successful in negotiations with their tenants for new, improved lease agreements that align better with current financial situations. It is possible these successful rent concessions could have followed the Government’s publication of The Code of Practice for Commercial Property Relationships in June 2020. A key takeaway from this documentation was that tenants were (and still are) required to be transparent with their landlords regarding their finances, although the code itself has not been seen as a mandatory order.

 

Binding arbitration

In the Government’s recent announcement, it was declared that new legislation will be introduced in the coming months to ring-fence arrears which have built up while commercial tenants were forced into temporary closure due to successive pandemic lockdowns. It is still expected that landlords and tenants will try to negotiate agreements in terms of all arrears relating to COVID-19, but naturally, not all negotiations will result in success. To address this, the Government advised that a new legally binding arbitration process will be introduced for landlord and tenant disputes that have yet to be resolved.

No date has yet been given as to when this proposed legislation will be published but it is expected in Autumn 2021, which is why we strongly encourage commercial landlords and tenants now to seek legal advice early on in their negotiations. It is expected that tenants who can pay should pay. We understand the difficulties involved with securing early settlement of these types of disputes between landlords and tenants, but it is even more important to try to achieve this quickly, otherwise, both parties risk being forced into binding arbitration later this year.

Find out more about our
rent dispute resolution service

Our property litigation experts work closely with both commercial landlords and tenants,
to help both parties reach commercial solutions, provide legal advice and support during any negotiations.

We have worked with a variety of landlords and tenants and have a market-leading property disputes teams
who can support you at all stages of your dispute.

What can commercial landlords do?

We understand the importance of generating income quickly and efficiently, particularly given the financial crisis following COVID-19. We also know it’s crucial for any commercial landlord to protect their capital value and maintain bank interest covenants; it’s a case of striking a balance between these that can be challenging at the moment.

 

Commercial landlord remedies for non-payment of rent

Any commercial landlords facing rent arrears resulting from the pandemic have a number of options to consider. As a commercial landlord, the remedies for non-payment of rent currently include starting Court proceedings to recover rent arrears. Nevertheless, it is always better to first explore with your tenant whether both parties can find a solution which they can agree to commit to.

Problems can occur when tenants assume/expect their landlords to offer reduced rent (under false assumptions that they can afford to do so). This risks placing landlords into a negative cash situation with their tenants. These are the sorts of issues that can cause disagreements between both parties, which could put successful negotiations at risk.

 

Risk of insolvency

Many landlords will accept that negotiations and rental concessions are crucial to long-term financial stability. Being able to reach mutual agreements is important to allow tenants to continue their business, given that finding replacement tenants who can afford to pay (and who aren’t still reeling from the pandemic) can be challenging.

If landlords were to lose tenants to insolvency in this current climate the costs of going through the insolvency process are high, and they would potentially need to survive with empty premises and be liable for business rates.

 

Debt recovery

Some landlords may nevertheless choose to adopt a debt recovery strategy. It’s widely known that many commercial landlords or tenants do not look upon debt proceedings favourably, as reputational damage can be a factor. There is currently no bar on landlords starting debt proceedings in the Court – and they may decide to still do so and risk them being stayed to arbitration if they are not concluded by the time the proposed new legislation becomes law. Landlords will normally be able to include within their proceedings a claim that their tenant pays their legal costs as well.

We have a team of debt recovery specialists who can help if you wish to start the recovery of debt proceedings against your tenant.

How we can help

Our solicitors are highly experienced in commercial landlord representation.

  • We can help commercial landlords negotiate new terms, so both parties can come to an arrangement for commercial rent arrears recovery that minimises the impact on their business.

  • We have a team of experts in property litigation and debt recovery, who can provide legal advice for negotiations with your tenant.

  • We can give specialist support to help you find a commercial solution, or equally, we’re able to represent you throughout any commercial rent arrears recovery proceedings.

To discuss your options and to find out how we can help you and your business call us on 0330 024 0333 or request a call back, and one of our rent dispute resolution experts will call you.

What can commercial tenants do?

Many commercial tenants have felt the financial strain of the pandemic lockdowns, and equally the strain it has posed on relationships with their landlords. We understand the priority for all tenants is their business, and how important it can be to ensure they can keep trading from their current premises to enable business as usual.

Throughout the moratorium, tenants have been encouraged to pay as much as they can afford and give their landlords as much financial transparency as possible. The Code of Practice says as much, with the concept of enabling landlords to provide appropriate support wherever they can, to avoid any insolvency proceedings or bad faith between parties. Unfortunately, the Code as we know does not have any teeth as it is not mandatory legislation.

This means there are still many tenants who are yet to agree on concessions with their landlords. From our perspective, it’s advisable that any commercial tenant looking to negotiate in this way should take note of what the Code outlined, and to consider providing details of their financial information to their landlord in negotiations.

We also strongly advise commercial tenants to get in touch with our team, so we can give appropriate legal advice to support them throughout the negotiation process.

It’s worth noting the importance of trust here too. If trust is broken down between landlord and tenant due to unwillingness to share information or at least trying to negotiate properly with transparency, this is likely to form a barrier to success.

 

What happens after 25th March 2022?

Regardless of the moratorium, tenants are still expected to pay their rent whether it fell due during the pandemic or afterwards. The impending arbitration process will only apply to pandemic arrears, and there is every chance that the actual legislation (once published in the Autumn) may include various exemptions so that some tenants may still be at risk of action for pandemic arrears. There will naturally be questions from both parties, and unfortunately in the meantime, the Courts are choked with a significant backlog of rent proceedings. There is a large value of unpaid rent locked up in those proceedings.

It is clear that commercial tenants are expected to “sort out their differences” by early negotiations with their landlords themselves, otherwise, they risk facing the consequences of either Court action or forced arbitration.

It’s important to note all tenants could still be sued for arrears accrued for non-payment of rent during the pandemic. If a tenant and their landlord are forced into binding arbitration, this process is only likely to cover arrears accruing due throughout the pandemic. That also means tenants are still liable to face proceedings for post–pandemic rental payments (as they are not likely to be subject to the arbitration process in any event) which could leave them in a worse financial state than if they’d agreed to concessions with their landlord.

 

Breathing Space: The Debt Respite Scheme

On 4 May 2021 the Government introduced “Breathing Space”, a debt respite scheme that gives some debtors legal protection from their creditors. Standard breathing space is available to anyone with problem debt; it gives them legal protection for up to 60 days. There is also breathing space available to certain individuals on mental health grounds.

Some commercial tenants who are individuals may qualify for this.

Find out more about the Breathing Space Debt Respite Scheme >>

How we can help

Our solicitors are highly experienced in commercial tenant representation.

  • We can help commercial tenants negotiate new terms, so both parties can come to an arrangement for commercial rent arrears recovery that minimises the impact on their business.

  • We have a team of experts in property litigation and debt recovery, who can provide legal advice for negotiations with your landlord.

  • We can give specialist support to help you find a commercial solution, or equally, we’re able to represent you in terms of resisting any debt recovery action.

To discuss your options and to find out how we can help you and your business call us on 0330 024 0333 or request a call back, and one of our rent dispute resolution experts will call you.

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Coronavirus – what it may mean for commercial landlords and tenants

UPDATE | Many landlords and tenants will be paying close attention to how the continuing spread of coronavirus over the coming months may affect their business and in particular their leased premises.

Now that the Government has closed down the majority of retail, hospitality and leisure business to stop the spread of the virus, landlords and tenants should be aware of the parameters of their leases to see if they can minimise the impact of these necessary restrictions during this challenging period. We take a look at some of the points which you may be considering.

If you’re a tenant

Reducing your rent

If you’re a tenant and pay rent in accordance with a turnover clause, then you may see a significant decline in takings for your business if Government restrictions/recommendations affect your footfall.  You may expect to see a reduction in the amount of rent that you pay to the landlord at the end of the rental period.

Whether or not this applies will depend on the terms of the turnover rent clause in your lease and whether there are any other lease requirements on the tenant to keep open and maintain active trading throughout the period.

If you pay a fixed sum for rent, you could seek to negotiate a rent concession or rent deferment with your landlord. If your landlord is unwilling to engage with you, then there is the drastic option of withholding payment of the rent, as temporary changes to the law mean that landlords cannot forfeit your lease for at least three months (from March). However, this carries obvious risks including landlords still being able to begin recovery action against a tenant (or a guarantor), even if they are unable to terminate the lease.

Breach of your quiet enjoyment

You may be the tenant of a multi-let building or a shopping centre. If a landlord is required to close all access to your building then, arguably, the landlord has breached its lease obligation to you to allow quiet enjoyment to your premises as the closure will have been taken without your agreement.

If this is the case, it is worth considering taking steps now to preserve evidence in order to raise this claim for damages against your landlord once any coronavirus restrictions are lifted and you have regained full use of your premises.  For example, you should track and retain full records of the takings of your business and loss of profit and any other direct costs which you have incurred over the period of closure.

However, tenants are unlikely to succeed with such a claim, given that the current Government guidance is for non-essential businesses to close. Nevertheless, for those that can potentially run a take-away service and adhere to guidelines safely, a discussion can be had with the landlord to keep the premises open. If a landlord is still not willing to permit access, then tenants could consider a claim for breach of the quiet enjoyment provisions.

If you’re a landlord

Frustration of the lease

Landlords are likely to face claims by some tenants that they cannot survive as a business even for a short period of a few months without full access to and use of their premises. Those tenants may even try to argue that their lease should now be brought to an end altogether as a result of the footfall restrictions resulting from any spread of COVID-19.

It is extremely difficult to argue that a lease has been frustrated due to external influences in this way, as the case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] highlighted. In this case, the European Medicines Agency failed to persuade the Court that Brexit as an event was capable of “frustrating” the purposes of the lease. Landlords should take some comfort therefore that similar principles ought to apply to COVID-19 and should be ready to resist any challenges by their tenants on this basis.

Insurance

Tenants may seek to invoke rent suspension clauses in their lease if they can show that a connection between COVID-19 and the typical insurance provisions in their lease. Landlords should be able to resist these claims by reference if they can show that COVID-19 does not fall within the definition of Insured Risks in the lease.

Likewise, standard Uninsured/Insured Risk provisions require there to be destruction/damage to the premises. It could be considered stretching the argument too much to say that the requirement to decontaminate/deep clean premises is sufficient to classify premises as damaged property. In light of the above, it is unlikely that the rent suspension provisions will apply.

As ever, the extent to which you may be able to invoke any of the above – whether you are a landlord or tenant – will depend on the precise terms of your lease and how those provisions can be interpreted in the circumstances.

Contact us

To discuss how any of the above issues may affect you please contact Justine Ball or a member of our real estate disputes team in your local office.

You can register for one of our online webinars, or contact the events team for more details. For more general business advice in relation to coronavirus visit our dedicated resource hub.

For advice or guidance on any other legal issue, a member of our team can help – please click here to discuss.

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