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Dealing with Commercial Rent arrears post Covid-19

23 May 2022

Covid-19 Legislation was passed to protect commercial tenants from eviction for non-payment of rent and to limit other remedies being exercised against defaulting tenants. This update summarises how the needs of both occupiers and their landlords will now be dealt with.

Key Provisions

On 24 March 2022 the Commercial Rent (Coronavirus) Act 2022 (the "Act") came into force in part, to assist with commercial landlord and tenant relations with regards to outstanding arrears for business premises. The Act provides an arbitration scheme for commercial arrears (the "Scheme"). The Scheme enables an arbitrator to award particular forms of relief from payment, where the matter has not been resolved by agreement between the parties.

A revised Code of practice was also published on 7 April 2022 for commercial property relationships, replacing the original code last updated in November 2021, to provide a process for parties to negotiate towards settling Covid arrears (the "Code"). The Code is now mandatory for parties if arrears fall within the Scheme. It is also deemed to be the practice to be adopted by landlords and tenants where arrears fall outside of the Scheme. Pre-existing arrangements for payments that have been agreed remain unaltered.

The Government has also published a finalised version of the statutory guidance for arbitrators together with a list of bodies who have been approved to act as arbitrators for such matters.

Background

Pursuant to the Act, Covid arrears for business premises are 'ring-fenced' meaning landlord remedies remain  suspended in respect of such debts relating to any  tenant who was subject to a lockdown closure requirement for the period starting on 21 March 2020. 'Protected rent debts' include:

  • Annual rent;
  • Service charge;
  • Interest on an unpaid amount;
  • VAT; and
  • Insurance rent.

The ring fenced period runs from 21 March 2020 until the last date operating restrictions were removed from the relevant sector (the "Protected Period").

If the Act applies, a moratorium comes into effect until the earlier of the conclusion of the arbitration or 23 September 2022 (if an application for arbitration has not been lodged). During such a moratorium, the landlord is prohibited from exercising the following remedies against the tenant:   

  • Drawing down on or topping up a rent deposit.
  • Forfeiture for non-payment of rent.
  • Issuing Court proceedings for a money judgment or enforcing a Judgment for protected rent.
  • Exercising CRAR.
  • Presenting a winding-up petition.
  • Presenting a bankruptcy petition.

As well as the tenant, a moratorium will apply to a guarantor or former tenant.

Arbitration  

A landlord or tenant may only refer arrears that relate to a Protected Period and this must be done within six months from 25 March 2022. If a referral is not made by 23 September 2022, the parties will lose the right to arbitrate (although this period may be extended).

The arbitration process in the Act is divided into 3 stages:

STAGE 1 - the pre-arbitration stage

 

  • A party making a reference must notify the other party of their intention to make a reference to an approved arbitrator, with a settlement offer, a formal proposed solution  and supporting evidence. 
  • There is then a procedure with prescribed timings for offers, counter-offers, proposals and counter-proposals.

STAGE 2 – eligibility assessment

 

  • The arbitrator decides if the dispute is eligible for arbitration.
  • The matter must relate to a business tenancy and a protected rent debt and the parties cannot have already reached an agreement in relation to the arrears.
  • The arbitrator also determines if the  tenant’s business  is viable or would become viable if given relief from payment.

STAGE 3 - assessment of relief from payment of a protected rent debt

 

The arbitrator determines the matter of relief from payment of the protected rent debt by assessing the parties' formal proposals and supporting evidence. The arbitrator applies the following doctrines to the proposals:

  • the award should retain the viability of the tenant’s business to the extent it is consistent with conserving
  • the landlord’s solvency; and
  • that the tenant should, so far as consistent with the above, pay the protected rent debt in full and without delay.

Comment

The arbitration scheme is intended as a last resort and landlords and tenants should negotiate their own agreements where possible.    

The intention to keep the tenant’s viability whilst ensuring the landlord stays solvent.

Tenants can take comfort that the ring-fenced arrears remain out of reach of landlords for the time being, ensuring business viability, whilst landlords will feel some relief that rents falling due beyond the protected period will be payable in full.

When contemplating referring under the Scheme:

  1. Determine any business properties which may fall within the remit of the Act;
  2. Get professional advisers to assist with navigating compliance with the procedures and drafting of formal proposals as those formal proposals are fundamental as they form the basis on which the arbitrator determines relief from payment; and
  3. Collate all documentation evidencing both the viability of the tenant’s business and the preservation of the landlord’s solvency.
  4. Be alert to the fact that all references must be made by 23 September 2022.

For further information on this topic, please read our previous article.

Further Reading