Clarity For Commercial Tenants & Landlords Following The Pandemic
Key Contact: Jennifer Butcher
Author: Laura Spence
A positive development on the Government’s perspective on commercial rent arrears demonstrated by a new Code of Practice for commercial Landlords and Tenants and the Commercial Rent (Coronavirus) Bill 2021-22
Since March 2020 the coronavirus outbreak has forced many businesses to close, some temporarily through periods of Government restrictions and others permanently. To this day, many landlords and tenants have been unable to resolve disputes over rent arrears which resulted from these closures. In recent weeks the Government introduced the Commercial Rent (Coronavirus) Bill 2021-22 which is intended to bring these disputes to swift resolution. The Government’s previously published Code of Practice for commercial Landlords and Tenants has also been updated, aligning with the draft legislation.
Despite the intended benefits to the draft legislation and Code, it is intended that any existing agreements in place between landlords and tenants should continue to be honoured and neither the Code nor the Bill should change that.
Code of Practice for commercial Landlords and Tenants (“the Code”)
Alongside the Bill, the Code can be used by any business to settle rent disputes. Landlords and tenants are encouraged to determine how they can share the cost of pandemic related commercial rent arrears. Tenants who are unable to pay in full are expected to negotiate with their landlord in the expectation that the landlord waives some or all of the debt, if it is able to do so. The following principles should be considered when determining what rent is owed after premises being closed due to Covid-19:
- Preservation of a viable business; however
- Preservation of a viable tenant’s business should not be at the expense of the solvency of the landlord.
- Where a tenant can afford to pay for their rent in full, they should do so and any relief should be no greater than what is absolutely necessary to afford payment.
The landlord and tenant should be unified when negotiating rent arrears, demonstrating transparency, reasonableness and swift resolution.
Commercial Rent (Coronavirus) Bill 2021-22 (“the Bill”)
The Bill includes provision for a mandatory and binding arbitration procedure, which will determine disputes between landlords and tenants, where agreement cannot be reached directly. Whilst the full detail has not been confirmed, it is believed that the procedure will protect tenants from debt claims, County Court and High Court Judgments and bankruptcy petitions.
The legislation demonstrates the Government’s desire to save businesses with the key principle being that rent debt accrued as a result of forced closures should not force a viable business to cease operating. The Bill will apply to England and Wales, with Northern Ireland having a power to apply a similar legislation. The Bill will not apply to Scotland but they will be expected to make use of the Code.
“Ringfenced Debt”
- The Bill will temporarily prevent certain remedies and measures from being exercised in relation to ‘ring-fenced’ debt.
- Landlords will be prevented from drawing down on tenancy deposits to cover outstanding ringfenced rental arrears.
- Once arbitration has started, tenants may not include the ringfenced debt in any CVA or statutory restructuring plan for a period of 12 months after the arbitration award is settled.
The Bill takes away the fear of debt claims and bankruptcy for tenants
The Bill will prevent issue of debt claims including ringfenced debt from commencement until the end of the arbitration application period or the arbitration process.
A petition for bankruptcy relating to debts within the scope of the Bill where the statutory demand or claim was issued between 10 November 2021 and commencement of the Bill will be void, and any order made relying on such petitions would also be void. The legislation should therefore provide great comfort to tenants.
When will it take effect?
The Government hope that the Bill will come into force from 25 March 2022. To provide the time to introduce and pass legislation, certain temporary restrictions such as the moratorium on forfeiture and the use of the Commercial Rent Arrears Recovery remain in place until March 2022.
The House of Commons Public Bill Committee will scrutinise the Bill in early December and it is inviting views now by way of written evidence.
Commentary
A tenant will need to strike a careful balance between showing that it needs relief and maintaining that it has a viable business. While the draft legislation focuses on arbitration, it doesn’t relate to the legal rights of the parties. The process revolves around the arbitrator’s commercial assessment as to how much a tenant can afford to pay and how much a landlord can afford to write off.
The proposed Bill allows arbitrators a relatively wide degree of discretion in a number of matters, including determining whether to dismiss the reference to arbitration, whether and what relief from payment should be awarded to a tenant, and who should bear the costs of the arbitration. The wide discretion conferred does run the risk of different arbitrators coming to different decisions even where there are similar facts and therefore, the Bill has attracted some criticism. Additionally, it is uncertain where a tenant will be left if the arbitrator determines its business is not viable and the arbitration process is therefore not even available.
Conclusion:
Together, the Commercial Rent (Coronavirus) Bill and commercial rents Code of practice set out a clear path for both landlords and tenants to move from dispute to resolution together. This will help business of different sectors and size to grow and plan for a bright future following great hardship.
If you are a landlord or tenant that has been affected by coronavirus rent arrears and require legal advice, contact our Property Litigation Team for more information.
