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Commercial Rents – Important Update

On Friday 25 March 2022, the Commercial Rent (Coronavirus) Act 2022 (“the Act”) was enacted and became law.  The Act lifts the protections put in place to protect commercial Tenants whose businesses, and their ability to pay their rent, were adversely affected by the government’s response to the Covid-19 pandemic.  The Act also brings with it a specific mechanism to deal with what is now known as “Protected Rent” which is the rent payable under a commercial tenancy during the period in which a Tenant’s business was forced to close during the pandemic or affected by similar restrictions.

The headline features of the Act are that Landlord’s can now forfeit Leases where rent due and payable has not been paid, they can levy their rights under the Commercial Rent Arrears Recovery mechanism (“CRAR”) and they can present winding up petitions in certain circumstances, except in relation to Protected Rent.

In relation to Protected Rent, the Act and accompanying Code of Practice introduces a binding arbitration process to resolve disputes as to rent accrued during the time in which business were affected by the pandemic. The arbitration process is designed to ascertain what relief, if any, a Tenant is entitled to with a view to avoiding those businesses becoming insolvent as a result of measures beyond their control.

Applicable Tenancies

The Act will apply to premises occupied for business purposes.  Those are tenancies which were entered into pursuant to, and also ‘contracted out’ of, the Landlord and Tenant Act 1954.  It does not apply to agricultural tenancies or tenancies relating to mining activities.

What Constitutes a Protected Rent?

There are two conditions to be satisfied in order for a debt to qualify as a Protected Rent.

Firstly, the Tenant’s business must have been “adversely affected by Coronavirus”.  In order to satisfy this condition, the Tenant’s business must have been subjected to a forced closure requirement between 21 March 2020 and 18 July 2021 (in England) or 07 August 2021 (in Wales).  This also applies to Tenants’ businesses where only part of their businesses had to close.  For example, if a cafe or a restaurant could only serve people outdoors, this condition will be met.  Businesses which never had to close, such as pharmacies, supermarkets etc. will not satisfy this condition.

The second condition is that the rent arrears must have accrued within the “Protected Period”.  The Protected Period is defined as 21 March 2020 and ends with the last day that the business was subject to a closure requirement or specific restriction for that particular type of business.

Disputes Concerning Protected Debt

As I have mentioned, the Act introduces an arbitration process through which disputes regarding Protected Debts will be resolved. The arbitrator will specifically assess whether the Tenant’s business is viable enough to pay the arrears or whether it could be viable if the Tenant was to benefit from some form of relief in relation to the Protected Debt.  The commercial viability of the business is not defined in the Act and will be at the discretion of the arbitrator.

The arbitrator will have the power to:

  • Write off the whole or part of the debt;
  • Defer payment of the whole or part of the debt; and/or
  • Reduce or write off any interest payable on the debt.

The sole aim of any award by the arbitrator is designed to preserve or restore the viability of the Tenant’s business but it will not do so at the expense of the Landlord’s solvency.  Relief will only be granted if it is necessary to keep the Tenant’s business afloat.

The evidence likely to be considered in this process will include evidence relating to the businesses performance since March 2020, the net assets/liabilities position, previous history of rent payments, any demands in relation to other non-rent related debts by other creditors and its ability to pay them and a consideration as to the impact of Coronavirus on the business generally.

The arbitrator will have regard to similar evidence in relation to the Landlord’s solvency when arriving at a decision.

The Arbitration Process

Any dispute regarding Protected Rent can be referred to arbitration either by the Landlord or the Tenant but either side must make a referral within 6 months.  The cut off to commence arbitration proceedings is therefore 25 September 2022.

Either the Landlord or the Tenant will commence the process by serving notice of their intention to bring the matter to an approved arbitration body.  Within 14 days of receipt of that notice, the other side can submit a response.  If a response is submitted, arbitration can be commenced 14 days after that response.  If a response is not submitted, arbitration can commence once 28 days have passed since the service of the initial notice of the intention to refer to arbitration.

Once those requirements have been satisfied, the referral to arbitration is then made.  The referral to arbitration must include a proposal outlining how the matter should be resolved.  The opposing side will have the opportunity to submit an alternative proposal within 14 days and thereafter both parties must, if they so intend, submit a final revised proposal within 28 days.

At the arbitration, the arbitrator will assess both parties’ proposals against the backdrop of the Tenant’s viability and/or the Landlord’s solvency.  If the arbitrator considers one proposal to be more viable than the other, the arbitrator will make an award to that effect.  If either proposal seems viable, or neither appear to be viable, the arbitrator has the discretion to make an award which it considers most appropriate.

In respect of the cost of the arbitration, both parties will bear their own costs as well as 50% of the arbitrator fees.  The arbitrator does, however, have discretion to order one party to pay a greater proportion of the arbitrator’s fees if it considers that one party has not behaved reasonably.

Moratorium In Relation to Protected Debt

In relation to Protected Debts only, the Act introduces a moratorium to prevent Landlords from enforcing their usual remedies in relation to rent arrears.

In relation to Protected Debts, Landlords will be unable to:

  • Forfeit a Lease;
  • Levy CRAR;
  • Draw against deposits;
  • Issue debt claims;
  • Enforce judgments; or
  • Instigate winding up or bankruptcy processes and restructuring procedures.

What About Non-Protected Debts?

In relation to debts which are not protected by the Act, the full range of usual remedies are open to Landlords once again.  Provided the rent arrears are not a Protected Debt, Landlords can forfeit a Lease (subject to waiver of forfeiture and relief from forfeiture), commence insolvency processes, enforce money judgments, levy CRAR and draw against deposits etc.

Commentary

This will come as welcome news to Landlords who have arguably shouldered the burden of pandemic related rental debts since March 2020.  Tenants remain protected in relation to debts accrued directly as an impact of the pandemic but they need to be aware of potentially severe consequences of the non-payment of non-protected rent debts.

The Act will not apply where Landlords have already agreed to rent proposals in relation to pandemic affected debt at a time when they had no idea that this Act was on the horizon.  Whatever side of the fence you sit on, the positive aspect about the Act for both Landlords and Tenants is that it will force both parties to collaborate and to talk about the best means of resolving rent related disputes at a proportionate cost.

 

 

This alert does not provide a full statement of the law and readers are advised to take legal advice before taking any action based on the information contained herein.

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