Many businesses have struggled to pay rent to landlords during the pandemic and have built up significant debt. This, together with a dramatic drop in footfall, has presented the greatest threat to the retail and hospitality industry. In response to the looming crisis, the government introduced a moratorium on the eviction of commercial tenants. Whilst this gave some breathing space to tenants, it effectively kicked the debt can down the road and there remains an estimated £6.4 billion of commercial rent debt accrued since the start of the pandemic.

With the moratorium on evictions (technically known as ‘forfeiture’) currently due to expire on 25 March 2022, the government recently published its proposals regarding a new Code of Practice together with draft legislation, known as the Commercial Rent (Coronavirus) Bill, to deal with arrears accumulated by commercial tenants during the Covid pandemic period. The legislation is due to come into force on or before 25 March 2022.

Summary of the new legislation

The proposed legislation introduces a new arbitration system binding on landlords and tenants. Where the scheme applies, it will enable either landlords or tenants to apply to an arbitrator to settle disputes relating to arrears that have accumulated during the Covid pandemic (as defined by the legislation). The arbitrator will have discretion to write-off arrears owed by tenants and/or to defer payment.

The legislation also further curtails remedies that would ordinarily be available to landlords to enforce debts owed by tenants which are caught by the scheme.

The key points are as follows:

Who does the scheme apply to?

The legislation, and therefore the arbitration process, only applies to those businesses which were forced to shut during the Covid pandemic by government order. These are including hospitality, non-essential retail and hotels.

Other sectors, including those businesses operating out of offices, are not caught (and therefore do not have the protection of the legislation), even where Covid has had a material impact on those businesses forcing them to shut temporarily.

However, the scheme has not been designed as a shield for well-funded tenants to hide behind - the government has made it clear that the scheme only applies to those business who are unable to pay the ring-fenced debts. For those businesses who are eligible for the scheme but are in a position to pay – they will be expected to pay any arrears to their landlord in full. Equally, the scheme only applies to businesses that are ‘viable’ (or would be viable if they received relief from COVID arrears). Whilst the Code of Practice does not set a definition of viability, where a tenant has been unable to pay its rent since the restrictions were lifted, this is likely to be used as evidence by the landlord that it is not a viable business and it may therefore find itself ineligible for the scheme.

Which periods are caught by the scheme?

The scheme is limited to arrears accrued during a ‘protected period’. A protected period is the period during which the tenant’s business was forced to shut as a result of the government restrictions commencing on 21 March 2020 and terminating at different times for the various sectors, the latest date being the earlier of 18 July 2021 and the last day on which the tenant’s business was subject to restrictions. The arrears accrued during this period are referred to as the ‘ring fenced debt’.

Does the scheme just apply to arrears of rent?

The scheme does not just apply to arrears of rent, but also includes service charge, insurance and interest together with any other sums due under the tenant’s lease during the protected period.

How does the arbitration work?

Landlords and tenants caught by the scheme are encouraged to try and reach a negotiated settlement in relation to the ring-fenced debt between themselves. If they are unable to reach an agreement, then either party can refer the dispute to arbitration. To do so they must apply within six months of the legislation being enacted - which is intended to be a strict cut off date.

In terms of the arbitrator’s powers: the arbitrator will be able to write off or defer payment of arrears (for up to 24 months) which relate to a protected period. In making their decision the arbitrator will be guided by the principles set out in the Code of Practice – with the overarching aim being to preserve the viability of the tenant’s business albeit this should not be ‘at the expense of the solvency of the landlord’.

What is the position where the parties have already reached an agreement?

Until the legislation comes into force landlords and tenants are encouraged to continue negotiations in accordance with the principles set out in the Code of Practice. Where a settlement or rent concession has already been reached and/or is concluded prior to the legislation being enacted, such agreements will remain binding on the parties. The scheme cannot be used to re-open concluded settlements.

Can landlords still issue court proceedings in relation to arrears?

Landlords who have issued court proceedings in relation to ring-fenced debt before 10 November 2021 are entitled to continue with those proceedings in the usual way. Any proceedings issued on or after 10 November 2021 will be stayed until the later of six months from the date this legislation is enacted and the date any arbitration proceedings are concluded.

Landlords will, however, be able to issue proceedings in relation to debts not falling within the protected period.

Takeaway

Where the scheme applies, the legislation removes the final remedies that had been left available to landlords – namely issuing a debt claim. Allied with the fact that landlords will also be unable to pursue third party guarantors in relation to the ring-fenced debts, landlords will have now little option but to negotiate with their tenants in a meaningful way. Where a tenant is able to show that its business is still viable but that it is not in a position to pay some or all of the ring-fenced arrears, landlords will be expected to make a concession. If an agreement is not reached with the tenant, then the landlord’s hand will ultimately be forced by an arbitrator.

For those retailers who can show that they are caught by the scheme, they should be actively engaging with their landlord now with a view to agreeing a concession on the arrears so that they can begin to forward plan for 2022 and beyond.

By Mario Betts, Real Estate – Lewis Silkin

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