Thursday, 24 February 2022

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 The draft guidance explains the concept of "viability of a tenant’s business" and details how arbitrators should make the viability assessment.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.


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