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

Blog | Rent Disputes
Published: 29th March 2022
Area: Real Estate & Planning

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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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