Commercial Rent (Coronavirus) Act 2022 Now in Force

The Commercial Rent (Coronavirus) Act 2022 is now in force, and the general moratorium against forfeiture, re-entry and Commercial Rent Arrears Recovery (CRAR) is over.

Landlords may now be able to recover unprotected rent; enact forfeiture and CRAR; and petition to wind up a company in respect of unprotected rent that is in arrears.

Unprotected rent is basically rent that isn’t owed because of the Covid-related restrictions and closures that took place between March 2020 and July 2021.

Protected rent arrears are ring-fenced, so that if an agreement for repayment hasn’t been reached, there is now a 6-month period (ie until 24 September 2022) for landlords and tenants to refer the arrears to arbitration.

Only after 24 September 2022, if there is no arbitration or at the end of the process, might the landlord then be able to take further steps to recover the protected rent debt.

Either a landlord or tenant can apply unilaterally for arbitration. The arbitrators will look at the parties’ businesses and attempt to strike a balance between preserving the viability of the tenant’s business and preserving the landlord’s solvency. How this will work in practice remains to be seen.

Arbitrators may write off debts in full or in part, defer the debt for up to 24 months, or grant no concession at all.

The most important effect of the arbitration scheme might simply be to encourage landlords and tenants to strike a deal outside of the process, given the uncertainty of its outcome for either party.

The Act gives guidance on the arbitration bodies that can be approached and the timetable for arbitration.

Commercial Rent Arrears: With the Clock Ticking on the Moratorium, What Next?

With the government ending the last of the Covid-19 restrictions and the moratorium on enforcement expiring on 25 March 2022, where does that leave landlords and tenants of commercial property when it comes to settling the arrears of rent that have built up during the pandemic?

In November the government announced its detailed proposals on how commercial rent arrears accrued during the pandemic should be dealt with when it introduced in Parliament the Commercial Rent (Coronavirus) Bill, along with a new Code of practice for commercial property relationships following the Covid-19 pandemic.

The Bill, currently in the reporting stage in the House of Lords, is expected to become law soon and take effect from 25 March 2022.

The new law will only apply to commercial rent arrears that accrued while businesses were forced to close during the pandemic.

It ring-fences rent, service charge, insurance, interest on overdue amounts and rent deposit top-ups.

The ring-fenced sums are protected rents for a protected period beginning on 21 March 2020 and ending on the day when the premises were not subject to closure or restrictions regulating their use, for example limits on numbers or mandatory table service. For hospitality businesses in England, that date will be 18 July 2021; in Wales 7 August 2021. For non-essential retailers in England the relevant period ended sooner on 12 April 2021.

There will be a new statutory arbitration process for commercial landlords and tenants who have not already reached an agreement on how to deal with the arrears. Any agreements made voluntarily before the new law comes into force will not be affected.

The new arbitration scheme will last for 6 months from 25 March 2022, and during that period enforcement of protected rent arrears accrued during the protected period by court proceedings, CRAR, forfeiture or winding up will be prohibited.

The government has published draft statutory guidance on how arbitrators should exercise their functions under the new law.

To be eligible for arbitration, the tenant’s business must be viable, or would be viable if given relief. The draft guidance explains the concept of "viability of a tenant’s business" and details how arbitrators should make the viability assessment.

The “viability” test is likely to be very difficult for arbitrators to assess in practice, assuming there are even enough suitably qualified arbitrators to go round. This will undoubtedly be a controversial element in the process.

The new law will only apply to businesses legally required to close or cease trading during the ring-fenced period. It will not cover those businesses whose trade was affected in other ways.

Those businesses will have to rely on the Code, which provides guidance on how parties should approach negotiation regarding rent arrears that accrued during the pandemic.

The Code states that tenants must pay in full if they are able to, while maintaining the viability of their business. Where this isn’t possible, tenants are to negotiate with their landlords considering the behaviours, principles, affordability, and viability statements outlined within the Code.

This could be problematic for businesses that could have opened but chose not to as it was not considered to be in the best interests of their business.

What about tenants that elected not to participate in the “eat out to help out” super-spreading scheme? Will they be punished for failing to mitigate their losses?

There also does not appear to be any protection for loss of trade suffered during the Plan B restrictions over Christmas 2021, or closures due to staff sickness during the Omicron outbreak.

It’s possible these issues will never be addressed, in which case tenants will have to try and agree some sort of arrangement with their landlords to settle the arrears or spread out their payment.

For all other non-protected overdue rent, when the current moratorium ends on 25 March 2022 landlords will once again be able to enforce recovery by the usual methods such as forfeiture, CRAR, winding-up or drawing down on rent deposits.

 

COVID-19: New Proposals for Treatment of Pandemic-Related Commercial Rent Arrears Released

The government has finally announced its detailed proposals on how commercial rent arrears accrued during the pandemic should be dealt with.

The Commercial Rent (Coronavirus) Bill was introduced in Parliament on 9 November 2021, along with a new Code of practice for commercial property relationships following the COVID-19 pandemic.

The Bill will only apply to commercial rent arrears that accrued while businesses were forced to close during the pandemic.

It ring fences rent, service charge, insurance, interest on overdue amounts and rent deposit top-ups.

The ring-fenced sums are protected rents for a protected period beginning on 21 March 2020 and ending on the day when the premises were not subject to closure or restrictions regulating their use, for example limits on numbers or mandatory table service. For hospitality businesses in England, that date will be 18 July 2021.

The Bill provides for a new statutory arbitration process for commercial landlords and tenants who have not already reached an agreement on how to deal with the arrears. Any agreements made voluntarily before the Bill comes into force will not be affected.

It is proposed that the new arbitration scheme will last for 6 months from March 2022, and during that period enforcement of protected rent arrears accrued during the protected period by court proceedings, CRAR, forfeiture or winding up will be prohibited.

The Code replaces the earlier version first published in June 2020, and subsequently updated in April 2021, and provides guidance on how parties should approach negotiation regarding rent arrears that accrued during the pandemic.

It also includes guidance on the arbitration process, the evidence that will be considered and the principles the arbitrator will apply.

The government aims to pass the Bill by 25 March 2022, subject to parliamentary approval. The existing moratorium on forfeiture, CRAR and winding-up petitions will remain in place in the meantime.

Beware the Perils of Property Fraud

 

In a recent story reported across the mainstream media, a man described his shock at returning to his house and finding it stripped of all furnishings after it was sold without his knowledge.

His identity had been stolen and used to sell the house and bank the proceeds, and the new owner had been registered as proprietor at the Land Registry.

Although the facts in this case were stark, property fraud is on the increase.

The Land Registry paid out a total of £3.5m in compensation for fraud last year. It commented:

"We work with professional conveyancers, such as solicitors, and rely on them and the checks that they make to spot fraudulent attempts to impersonate property owners…Despite our efforts, every year we do register a very small number of fraudulent transactions”.

Some properties are more vulnerable to property fraud than others, especially those that are mortgage-free and unoccupied.

Is there anything you can do to protect yourself?

You can reduce the risk of becoming a victim to property fraud by doing the following:

1.     Make sure your address for service registered at the Land Registry is up to date. This is particularly important if you don’t live at the property and it will enable the Land Registry to contact you if it has concerns about a potentially fraudulent transaction.

2.     Sign up to the free fraud alert service operated by the Land Registry by email. Once they have your details, the Land Registry will email you if an official search or application is made against the property. You then have an opportunity to contact the Land Registry and provided you act quickly you may be able to stop a fraudulent transaction from taking place, or at least from being registered.

If a fraudulent transaction has taken place, then the question is which solicitor is responsible, the one acting for the purported seller, the one acting for the innocent buyer, or both?

This was the subject of litigation in 2018 resulting in the Dreamvar and P&P judgment handed down by the Court of Appeal.

In a complex judgment, the conclusion was that solicitors on both sides in a fraudulent transaction could be held liable for the loss. If the fraudulent seller’s solicitors fail to carry out sufficient checks on their clients, they must share in the responsibility for the loss – it cannot fall solely on the buyer’s solicitors.

However, many argued at the time (me included) that the liability should fall entirely on the solicitors acting for the fraudulent seller, rather than be shared between those acting for the fraudulent seller and those acting for the innocent buyer, and a powerful dissenting judgment given by Lady Justice Gloster in the Court of Appeal expressed that view.

The solicitor acting for the seller is after all in the best position to carry out the identity checks as part of the "know your client" and anti-money laundering processes undertaken when taking on a new client.

Buyers’ solicitors can try to protect themselves by asking for a warranty from the seller’s solicitors that they have carried out all appropriate identification checks.

 

COVID-19: High Court Grants Landlord Summary Judgment for Rent Arrears

 

The High Court* has granted a landlord summary judgment to recover rent and service charge arrears on premises that were closed during the pandemic.

The premises are a cinema in London’s Trocadero Centre.

The cinema had to close in March 2020 due to the pandemic and no rent has been paid since June 2020. The landlord brought proceedings for summary judgment for rent and service charge arrears of £2.9m.

The court rejected the tenant’s defences that there should be implied terms that they were not liable to pay for periods when the premises could not be used, and that there was a failure of basis.

The court found that the risk lay with the tenant, who could have taken out business interruption insurance (it was agreed that the pandemic was not an insured risk).

Judge Robin Vos stated there was “a long-standing principle that an inability of a tenant to use premises for the purpose intended at the time the lease was granted will not provide a defence to a claim for the payment of rent.”

The court had dismissed an application by the tenant to adjourn the summary judgment pending the introduction of the bindingarbitration scheme for pandemic rent arrears, which was a proposal announced by the government in June, but which has still not been enacted.

Until that arbitration scheme is up and running (which requires legislation), then regardless of the ongoing moratorium on forfeiture action, this case demonstrates that landlords are still able to sue tenants for non-payment even if the tenant was unable to trade during the pandemic.

*London Trocadero(2015) LLP v Picturehouse Cinemas Ltd and others [2021] EWHC 2591 (Ch) (28September 2021) (Robin Vos sitting as Deputy Judge of the High Court)

UPDATE: Permission to appeal to the Court of Appeal has been granted in London Trocadero, together with a stay of execution of the judgment pending the appeal. It is also understood that the High Court has granted Cine-UK Ltd permission to appeal in Bank of New York Mellon, and granted its application that the appeal should be transferred from the High Court to the Court of Appeal. 

Covid-19: Should Pandemic Clauses be included in Renewal Leases?

 

There have been two interesting cases recently on attempts to introduce new so-called “pandemic clauses” into leases as part of the statutory lease renewal process under the Landlord and Tenant Act 1954.

Both cases were in the County Court, and so have no binding effect on future cases, but they are useful examples of how the pandemic has affected lease terms.

The first case concerned WH Smith’s store in the West London Westfield Centre - WH Smith Retail Holdings Limited v Commerz Real Investmentgesellschaft mbH (unreported), 25 March 2021 (County Court) (Judge Richard Parkes QC).

The original lease was for 10 years and had expired in 2018, with the tenant holding over, but the parties agreed on a renewal lease of just 5 years.

The judge had already applied discounts to the passing rent totalling 54% to reflect the pandemic, the location, and the size of the unit.

Crucially, the landlord and tenant agreed in principle that a pandemic rent reduction clause should be included in the renewal lease to avoid the landlord facing a further 10% rent reduction to reflect the onerous liability of paying full rent during a lockdown.

The parties also agreed that it should be based on the tenant paying 50% of the rent and the whole of the service charge.

The judge agreed that such clauses have “become something that all tenants want, and that the market has now priced it in". The court was simply required to determine the mechanics of how that provision would operate.

This contrasts with a case concerning a Poundland store - Poundland Ltd v Toplain Ltd (unreported), 7 April 2021 (County Court).

In this case the court refused a tenant’s request to include clauses in a renewal lease that were not agreed in principle by its landlord and which would reduce the rent by 50% in the event of future government imposed lockdowns; relieve the tenant from complying with its insurance covenants during a lockdown; and vary the forfeiture clause to prevent the landlord from forfeiting the lease during lockdown (something the government has legislated to ban during the pandemic so far).

Where terms of a renewal lease cannot be agreed between the parties and so fall to be determined by the Court, Section 35 of the1954 Act provides for the court to have regard to the terms of the current tenancy and all other relevant circumstances.

The leading case on applying Section 35 is the well-known O’May v City of London Real Property Co Ltd [1983]. The burden of changing the terms of the current lease falls on the party proposing the change and the change proposed must be “fair and reasonable”.

Poundland argued that pandemic clauses should be included to modernise the lease, and that such clauses would be in the interests of both parties.

The landlord argued that there was no market precedent for such clauses; that it would fundamentally change the relationship between the parties; that the impact of any future lockdown would be controlled by legislation; and that the proper course for the tenant would be to take advantage of any benefits or grants offered by the government.

Citing O’May, the District Judge declined to introduce the pandemic clauses on the basis that it would not be fair and reasonable to expect the landlord to share the risk in circumstances over which the landlord would have no control and where the tenant could avail itself of reliefs or schemes offered by the government.

The District Judge distinguished this case from from WH Smith because in WH Smith the court had not been called upon to consider the O’May principles because the parties had agreed in principle to a clause reducing the rent in the event of a lockdown. Here, the court was considering a dispute between parties as to whether pandemic clauses should be included at all.

There is likely to be a spate of similar cases over the coming months, and it will be interesting to see whether a consistency of approach is taken in the county courts, and ultimately whether a case comes before the High Court.

Nevertheless, landlords should think carefully about what impact the absence of such pandemic clauses might have if the new lease is to include an open market rent review clause.

If pandemic clauses are “something that all tenants want”, which seems to be backed up by anecdotal evidence in the market, and become accepted market practice, then a tenant could argue for a discount on an open market rent review if the lease doesn’t contain such clauses.