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Resolving COVID-19 commercial rent arrears

New laws and a Code of Practice are being introduced to assist with the recovery of commercial rent arrears accrued during the pandemic.

As many commercial landlords will be aware, the Government has placed restrictions on the enforcement of commercial rent arrears since the start of the pandemic, such as a ban on arrears-based forfeiture and restrictions on insolvency procedures.

The Code of Practice for Commercial Property Relationships was published at the start of the pandemic to encourage landlords and tenants to co-operate and negotiate “affordable rental agreements” to ensure the survival of those tenants experiencing “severe hardship”.

Commercial Rents Code of Practice, November 2021

The new Code replaces the 2020 code and applies to all commercial leases held by businesses which have built up rent arrears as a result of the impact of the pandemic. It is not binding but parties are strongly encouraged to adhere to it.

The Code governs negotiations between landlords and tenants. It sets out that, in the first instance, tenants unable to pay in full should negotiate with their landlord in the expectation that the landlord will waive some or all of the rent arrears where they are able to do so.

Key provisions from the new Code:

  • Where it is affordable, a tenant should aim to meet their obligations under their lease in full. Any relief given should be no greater than necessary.
  • Tenants who are unable to pay in full should negotiate with their landlord in the expectation that the landlord will share the burden where they are able to do so by waiving some or all of the rent arrears.
  • The preservation of the tenant business’ viability should not come at the expense of the landlord’s solvency – however tenants should never have to take on more debt or restructure their business in order to pay their rent.
  • Negotiation is encouraged. As such, where parties reach a legally binding agreement, the arbitration process will not override this. If agreement cannot be reached, alternative methods such as third-party mediators should be considered.
  • Where a landlord and tenant are unable to reach agreement by negotiation, they may be able to apply for the new arbitration process. However, negotiation is encouraged even once arbitration has begun.

The Code also provides that where a tenant is seeking to deviate from the terms of the lease in respect of rent owed, they will need to demonstrate why they cannot afford payment as well as what payment or payment period might otherwise be affordable in the near future. It also lists examples of documents which could be used as evidence of affordability. These requirements under the new Code will be no doubt be welcomed by landlords, in particular.

The new Code also provides extra detail on how the Commercial Rent (Coronavirus) Bill will work in practice if it is passed.

Commercial Rent (Coronavirus) Bill

The Bill aims to assist with the resolution of rent arrears disputes and help the market to return to normal as quickly as possible. It will introduce a legally binding arbitration system for commercial landlords and tenants who have been unable to reach agreement on rent arrear debts under the new Code.

The key function of the Bill is to prevent further debt actions by landlords and to bring all efforts to resolve rent arrears within the scope of the new Code or the arbitration process.

The Bill will apply in cases where the tenant:

1. Is or was in occupation of a premises under a lease which satisfies the requirements of Part 2 of the Landlord and Tenant Act 1954 (primarily that the tenant occupies the premises for the purpose of business); and

2. Has a ‘protected rent debt’, i.e.:

  •  A debt constituted of rent, service charges, interest and/or insurance charges which arose under a lease during the ‘protected period’, i.e. from 21 March 2020 to the date when the last restrictions were removed from the tenant’s specific market sector. It is irrelevant whether the tenant was able to trade during that period.
  • The tenant’s business was ‘adversely affected’ by the pandemic i.e. some or all of the premises was legally required to close during the pandemic under the Public Health (Control of Disease) Act 1984.

If any one of the above criteria are not satisfied, the Bill will not apply.

Under the Bill, any debt claims issued at court between 10 November 2021 and the Bill coming into force which relate to arrears falling within the protected period will be stayed. Specifically:

1. All debt falling within the protected period under these claims, and any County Court or High Court judgment made in respect of them will fall within the scope of the binding arbitration process.

2. Landlords will not be able to issue debt claims for protected period arrears altogether until the end of the arbitration application period or the arbitration process.

3. Landlords will be prevented from petitioning for bankruptcy of a business tenant based on a statutory demand for any protected period debt served on or after 10 November 2021 and before the Bill comes into force.

4. Landlords will not be able to draw down on tenancy deposits to cover protected period arrears.

In terms of debts that do not fall within the scope of the new Bill, landlords will be able to exercise the ordinary remedies as they did prior to the introduction of the moratorium on enforcing rent debts (although parties are encouraged to adhere to the principles of the new Code).

Comments

The aim of the new Bill and Code is to provide a much quicker and more efficient process to resolve the outstanding rent arrears incurred as a result of the coronavirus pandemic. The goal is that by restricting the right of landlords to sue for these outstanding arrears and bringing the resolution of such disputes that have not been dealt with by agreement or judgment under one procedural domain, these disputes can finally be settled.

Landlords may not welcome the restriction on bringing court proceedings for rent arrears, as this effectively removes what was their last remaining enforcement option. However, the principles set out in the new Code do provide for more stringent testing of a tenant’s ability to pay.

Also, those arrears falling outside the protected period will be subject to the usual enforcement measures post March 2022. This will be welcome news to landlords who may be concerned that tenants may try to use the existing measures to avoid payment of rent for periods when they were not legally required to close.

 

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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