Landlords and tenants must reach agreement, pay up, or face binding arbitration as a last resort

The Government has published its response: Supporting businesses with commercial rent debts policy statement to its earlier call for evidence in relation to Covid-19 commercial rent arrears, together with a summary of the consultation responses.

The policy statement provides little new information on what has been reported previously:

'The Government has announced that it intends to put in place through legislation a scheme to ring-fence outstanding rent arrears relating to periods when a business’s ability to trade has been impacted by government action, and to introduce a binding arbitration scheme, with the moratoriums lifted once this legislation is in place.'

Landlords and tenants urgently need more clarity on how this will work in practice.  In the meantime, the response reiterates that the Government will:

• legislate "in the next Parliamentary session" to ringfence rent debt accrued during the pandemic from March 2020 for commercial tenants who have been affected by enforced business closures until restrictions for their sector are removed;

This will mean a return to normal contractual arrangements under the terms of the lease for those tenants able to pay their rent arrears in full and not affected by closures, and for any debts accrued outside of the ringfenced period.

• set out a process of binding arbitration to be undertaken by landlords and tenants. This is intended to be used only as a last resort when negotiations have failed on such matters as rent deferral/ waiver/longer term repayment plans;

The aim is for arbitration to be an "impartial and manageable process" and a faster and easier resolution than through the courts. The Government expects landlords and tenants to contribute to the cost of arbitration if both are found to have negotiated in good faith. However, if any party is found not to have negotiated in the spirit of the legislative principles, arbitrators may be empowered to grant the cost of arbitration as part of their decision.

• ahead of legislating on a system of binding arbitration, the Government will publish an outline set of principles that they expect the parties and arbitrators to adhere to in a revised Code of Practice which will be embodied in the new legislation;

This will allow landlords and tenants time to negotiate on that basis.

Until the further legislation is passed, the forfeiture moratorium for non-payment of rent for business tenancies in England is scheduled to apply until 25 March 2022 to allow landlords and tenants additional time to negotiate and settle outstanding rent arrears and for the new abitration process to be put in place. See current tenant protection measures. (In Scotland, the extended notice period of 14 weeks for irritancy for monetary breaches remains in place until 31 March 2022).

IMPACT

The Government expects businesses that are open and trading as normal to pay their full rent in accordance with the terms of their leases, unless otherwise agreed with their landlord, as periods of normal operation will not be covered by the further legislation.

Tenants should clearly state in writing to their landlord how payments they make are to be treated, specifying the period of time that the payment should be apportioned to, for avoidance of doubt.

The Government reports that hospitality rent payments continues to lag behind and this is particularly acute in the pubs, bars and restaurants sector, with just 28.4% of rent paid 90 days after the March payment date.

The new legislation applies only to debt for tenants impacted by COVID-19 business closures. As soon as legislation is passed, the commercial tenant protection measures will only apply to ringfenced arrears. This includes rent debt accrued from March 2020 by commercial tenants affected by COVID-19 business closures until restrictions for their sector are removed. This means that landlords will be able to evict tenants for the non-payment of rent arrears incurred prior to March 2020 and from the end of the ringfenced period. As normal periods of operation will not be within the scope of the further protections and binding arbitration in the legislation, tenants are encouraged to meet their rent payments for these periods.

Landlords can charge interest on rent incurred from the end of the ringfenced period onwards, if such interest payments are included in the terms of their lease.

If a tenant breaches any other lease terms (i.e. by causing damage to the property), which gives rise to a right to forfeit, the landlord is still able to take steps to evict the tenant. 

Tenants will be bound by the decision of the arbitrator and will have to pay rent debts accrued during the ringfenced period in accordance with that decision.

WHAT ENFORCEMENT OPTIONS REMAIN AVAILABLE TO LANDLORDS NOW?

Landlords still have the following range of enforcement measures either individually or in combination:

• drawing down on rent deposits and seeking top-ups;
• claiming against current guarantors;
• claiming against Authorised Guarantee Agreements or Guarantees of Authorised Guarantee Agreements for post-1996 leases;
• claiming against former tenants or former guarantors for pre-1996 leases;
• bringing debt proceedings at Court (subject to the relevant protocols); and
• issuing or progressing proceedings for possession, brought on the basis of breach of covenant other than that to pay rent.

COMMENT

The Government emphasis is on ensuring viable businesses can continue to operate and that debts accrued as a result of the pandemic are quickly resolved to mutual benefit. Many landlords and tenants have already reached agreement on rents, but there are still a number who refuse to work collaboratively to reach a compromise. As we move into the next phase with businesses open to trade, many hope that the legislation will be put in place sooner rather than later as much needed clarification is required on the new arbitration process and what some consider to be the current abuse of the moratorium. It does beg the question on the position of rent arrears for sectors which have moved in and out of trading restrictions during the pandemic, for example, non- essential retail and eat in restaurants or businesses that were subject to restrictions but were still able to trade profitably such as restaurants offering takeaway meals or retail premises which are partly essential and non- essential. The devil will be in the detail.