Updates on the Commercial Rent Arrears Situation

There is currently estimated to be between £6-8 billion of outstanding commercial rent owed by businesses to landlords in the UK. This has accrued from pandemic related-measures and lockdowns, whereby businesses who were badly affected by the pandemic could not afford to pay their rent. This has been a bone of contention between landlords and their tenants, many of whom have not been able to agree on what an appropriate remedy.

The government has made it very difficult for landlords to try and claim this money back, or indeed to take alternative actions such as evicting tenants who have refused to pay. The government has done this by enacting certain measures. One of these is a ‘moratorium’ on commercial rent: this is a legal authorisation to those in debt to postpone payments of their debt. Here, there is a condition that this rent must have been from a period of closures and lockdowns.

This is essentially a period of grace for tenants, and in what is a win for them, it has recently been extended util March 2022 by the government, meaning that qualifying business tenants have until that date to come to an agreement with their landlords on these outstanding payments.

However, now the UK is emerging from the economic hangover of the pandemic, the government has released details of the ‘mandatory arbitration process’ which will take place from March 2022. This is an alternative to court proceedings, whereby an independent individual or body will be appointed to settle disputes between landlords and tenants, and whose decision will be legally enforceable. It is designed as a last resort for the landlords and tenants who have failed to come to any sort of agreement. The government’s intention is to ensure that, where possible, rent debt accrued as a result of forced closures during the pandemic should not force an otherwise viable business to cease operating.

The government announcement came in the form of two documents: a Code of Practice for commercial property relations following the Covid-19 pandemic (“the Code”) and draft legislation for The Commercial Rent (Coronavirus) Bill (“the Bill”).

The effect of the draft Bill

There are two important aspects to the Bill. The first is its explanation of ring-fenced debts and its provisions with regards to these. The second concerns the binding arbitration process which the Bill introduces in March 2022.

Ring-fenced Debt Provisions

One detail will be welcomed by tenants. This is that qualifying businesses with outstanding rents (arrears), are to have these arrears ‘ring-fenced’ so that any landlord remedies, such as eviction, can be suspended with regards to these debts until the arbitration process takes place from March 2022. To qualify, a tenant will satisfy this requirement if it has a business tenancy and was mandated to close its premises or cease trading (in whole or in part) during Covid-19.

The ’ring-fenced’ period issues from the exact dates of the various government mandates, and is set out in the Code in Annexe A. It varies depending on which category a business falls under. It begins unanimously on 21 March 2020 and can end as late as 18 July 2021, in the case of nightclubs, for example. Certain sectors such as offices and pharmacies appear to fall outside the scope of the Bill.

Other important parts of the Bill stipulate that landlords are prohibited to commence any new court claims for debt from the date the Bill is passed as an Act (March 2022). Furthermore, any debt claims made between 10 November 2021 and March 2022 can be stayed on application of either party – this means that tenants will be able to delay any debt claims made against them, without needing the consent of landlords.

Another important takeaway which tenants will be relieved about concerns the use of tenant rent deposits by landlords to pay rent during the ‘ring-fenced’ period. The Bill orders that Landlords are prohibited from extracting any funds from tenants’ deposits to cover the Protected Rent Debt (i.e. rental debt accrued during the ‘ring-fenced’ period) between March 2022 and the conclusion of any arbitration, or the expiry of the time limit within which it can be invoked.

Binding Arbitration

The legally binding arbitration process to deal with covid-related arrears in England and Wales will be introduced by the Bill on 25 March 2022, for parties who have been unable to come to an agreement through negotiation.

Once both parties have submitted their proposals, and for the arbitration to take place, the arbitrator must then assess the viability of the tenant’s business. If the arbitrator determines that the business (a) is not viable, and (b) would not be viable even if the tenant were to be given relief from payment of any kind, they must dismiss the proposal.

The arbitration does not revolve around ‘legal rights’ per se, therefore, but the arbitrator’s commercial evaluation regarding exactly how much rent a tenant can afford to pay, and exactly how much a landlord can afford to write off – with the express aim that both parties remain in business and solvent. A tenant will therefore need to strike a delicate balance between demonstrating that it requires relief (and should therefore receive an award in its favour) and maintaining that it has a viable business, and that the case should proceed to arbitration.

Directors Duties

Interestingly, if the arbitrator decided that the business is not viable, the tenant may be put into a dangerous position by its creditors. This is because there may be director’s duties implications: specifically personal liability for the directors under wrongful trading. In this situation, where it is found that there is no reasonable prospect of the company avoiding an insolvent liquidation or administration, directors owe a duty minimise potential loss to the company’s creditors. If directors fail to comply with this duty, the court has the authority to order the director to make an appropriate contribution to the company’s assets.

Summary

Given the high level of uncertainty on both sides throughout the pandemic, this news finally offers a way forward for landlords and tenants. Tenants will primarily be relieved that the unpaid commercial debts remain out of reach from landlords, as do their rental deposits. Landlords can take comfort that there will finally be a legally binding process through which they can set out their case, which aims to balance on the one hand the viability of tenant’s businesses, and on the other, the preservation of the landlord’s solvency.