Commercial Rent Arrears: the new position

Few sectors have been as impacted by the pandemic as hospitality and leisure, and landlords and tenants have spent two years seeking to reach an agreement on the treatment of rent arrears as doors to venues remained closed. Rent concessions and waivers have been commonplace against a backdrop of restrictions on a landlord’s ability to exercise the usual remedies for recovery of rent arrears, most notably the statutory moratorium on forfeiture introduced by the Coronavirus Act 2020.

With the moratorium due to be lifted from 25 March 2022 (or earlier if legislation is introduced to that effect), we will move to a new legal regime for the recovery of unpaid rents with the introduction of the Commercial Rent (Coronavirus Bill). The new Bill will see the reinstatement of commercial landlords’ original enforcement rights however it will also allow for the ring-fencing and protection of any rental arrears accrued during the pandemic (provided these relate to a lease which was ‘adversely affected by Covid-19). In this case, usual landlord remedies will remain unavailable in relation to these protected sums.

If premises were required to be closed during the pandemic then the lease will be treated as being affected by Coronavirus and the protection of the legislation will apply, even if the tenant was able to continue to trade via take-away sales, for example.

The protected period for arrears commenced on 21 March 2020 and will end on the date upon which restrictions were removed from the tenant’s sector. Importantly, the sums to be protected will not just be annual rents, but all amounts which are payable for the use of the premises such as insurance payments and service charges for example.

Arbitration:

In parallel with the ring-fencing of protected arrears, a new arbitration process will be introduced which aims to further mandate how pandemic arrears are dealt with. For the first time landlords and tenants will be legally obliged to enter into arbitration. While the details are yet to be finalised, there are a few things we know:

• Where landlords and tenants have an existing agreement made prior to the introduction of the arbitration process, they are encouraged to honour that.
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Pub & Bar
• Tenants and landlords who wish to make use of the arbitration process must first partake in the compulsory pre-application stage whereby the party who wishes to pursue binding arbitration must notify the opposing party and submit a proposal for settlement supported by evidence. Information so far published would suggest that there will be a higher burden on the tenant to provide proof of affordability and viability throughout the process. Where an agreement can’t be reached in the pre-application stage, a more formal process will then be entered into where proposals and counter proposals are submitted to the arbitrator along with supporting evidence.

Whilst some sector commentators are predicting a wave of hospitality insolvencies once the forfeiture moratorium is lifted, the new legislation will ensure that landlords will continue to be restricted in their ability to recover arrears which have accrued during the pandemic. This should offer some solace to tenants still trying to repair the financial damage caused by the pandemic as we hopefully return to a more normal trading environment.

Q. We voluntarily closed my businesses during the pandemic but were not legally obliged to. Will the Bill apply to us?

A. No. The Bill will only apply to businesses legally obliged to close during the pandemic. This includes bars, pubs, restaurants, retail businesses etc … However, if you voluntarily chose to close your business during a time when it was possible to remain open, the Bill does not apply to you.

Q. As a landlord / tenant what should I be preparing in the lead up to the new Bill?

A. Both parties should prepare forecasts and evidence detailing the expected impact of any reduction in rent. This should include reference to a party’s other assets and liabilities, its own borrowing obligations and its commitments to other stakeholders.

Q. What are the principles governing the arbitrators? What should I be aware of?

A. The appointed arbitrator will, in reaching their decision, take into account the guidance from the Code of Practice for commercial property relationships following the Covid-19 pandemic, which was published by the Government in November last year. The Code sets out what this arbitration process will look like, the kind of evidence that will be considered, and the key principles that it will adhere to – namely:

• The aim of preserving viable businesses
• That the preservation of the viability of the business of the tenant should not be at the expense of the solvency of the landlord
• That where it is affordable for a tenant to meet their obligations under the lease in full, they should do so without delay.

Q. As a tenant, how do I demonstrate to my landlord that my business is viable and affordable?

A. The Code provides that when considering viability, the parties need to assess whether, ignoring the rent debt which has accrued during the pandemic, the underlying tenant business is otherwise able to meet its obligations and to consider trade effectively. Relevant to this will be the tenant’s internal cash-flow statements, trading information and accounting records.

Originally published in magazine.