Commercial Rent Arrears … not back to ‘normal’ just yet
The moratorium on forfeiture action on the basis of rent arrears, which was part of a raft of measures to combat the Covid pandemic, came to an end on 25 March 2022.
Landlords are, therefore, now able to once again consider forfeiting a commercial lease in circumstances where a Tenant fail to pay future Rent payments.
But what about debts that have accrued over the course of the last 2 years? Unfortunately for Landlords, they cannot forfeit a lease on the basis of rent arrears that have accumulated during the pandemic.
The Commercial Rent (Coronavirus) Act 2022
The Government has for some time now been advocating commercial Landlords and Tenants working together, to share the pain of the pandemic, and where possible come to an agreement between themselves regarding the payment of debts that have accrued since March 2020.
The Commercial Rent (Coronavirus) Act 2022 received Royal Assent, and came into force, on 24 March 2022, introducing an arbitration process that is intended to enable commercial Landlords and Tenant to conclude disputes regarding certain debts arising during the Covid Pandemic, where they have been unable to reach an agreement between themselves upon the payment of those debts.
The Act applies to rent debts, which includes annual rent, service charge, insurance (known as ring-fenced debts”) arising in circumstances where
- the Tenant was required to close or cease trading, in part or in full, under legislation introduction to battle Covid;
- the Lease is a business tenancy, as defined by the Landlord & Tenant Act 1954
- the debt relates to sums that fell due during the period 21 March 2020 up until the date that restriction for the Tenant’s sector were relaxed (“the protected period”), and the Tenant was permitted to open once again.
Covid restrictions were lifted at different times for different sectors, so the extent of the protected period will depend upon what sector the Tenant’s business falls. In addition to providing some context to the new Act, the snappily titled Code of Practice for Commercial Property Relationships following the Covid-19 Pandemic (“the Code”) records the relevant protected periods, and I have set out below the end date for each sector in England (different dates applied for Wales).
- Outdoor Sport & Leisure - 29 March 2021
- Non-essential retail - 12 April 2021
- Self contained tourist accommodation - 12 April 2021
- Garden Centres - 13 May 2021
- Hairdressers - 18 July 2021
- Hospitality & Nightclubs - 18 July 2021
- Hotels and Bed & Breakfast - 18 July 2021
- Indoor Leisure - 18 July 2021
- Large Events Venues - 18 July 2021
- Personal Care - 18 July 2021
- Theatre & Cinemas - 18 July 2021
Where these conditions are satisfied, a party to a dispute concerning a ring-fenced debt will have 6 months from and including 24 March 2022 to refer the dispute to an independent arbitrator for determination.
Following the issuing of the Act, Landlords who are owed a ring-fenced debt are prevented from
- starting a debt claim to enforce the ring-fenced debt
- using CRAR to recover the the ring-fenced debt; and
- forfeiting the lease for non-payment of the ring fenced debt
until the 6 month period for referring the matter to arbitration has expired, or, if a referral is made, the arbitration has been concluded.
The arbitration process
There are still areas of uncertainty concerning this new process, and secondary legislation to iron out these kinks seems inevitable, but the (intended) process, in broad terms, is set out below.
Before a referral to an arbitrator is made, one party must issue notice to the other that it intends to refer the matter to arbitration. There is no requirement to set out any proposal to resolve the ring-fenced debt dispute with this initial notice, but it is envisaged that this will be common practice.
If the recipient of the pre-referral notice provides a response, the party initiating the process has 14 days to provide a reply, and either party can then refer the matter to arbitration. If no response is received to the pre-referral notice, either party can refer the matter to arbitration 28 days after the pre-referral notice was first issued.
The party referring the matter to arbitration must provide a formal proposal for resolving the matter, with evidence supporting the proposal. The other party may then should it choose to do so, file a counter-proposal, again supported by evidence, within 14 days.
Once he/she has satisfied themselves that the dispute is eligible for arbitration, and the parties have submitted their final proposals regarding the debt, an arbitrator will make an award, guided by the following principle
- preserve the viability of the Tenant’s business, in so far as it is consistent with preserving the landlord’s solvency;
- a Tenant should pay the ring fenced debt in full and without delay, in so far as this is consistent with the first principle above.
If the arbitrator determines that the Tenant's business is viable, or would become viable if provided with relief from payment, the arbitrator must consider whether to award relief and, if so, what kind of relief.
If one party’s proposal is consistent with the principles of viability and solvency, but the other is not, the arbitrator must make the award as set out in the consistent proposal that is consistent. If both party’s proposals are consistent, the arbitrator must make an award as set out in whichever proposal he/she determines to be most consistent.
It is only when neither formal proposal is consistent with the principles of viability and solvency, that the arbitrator will make an award that they consider appropriate.
The Awards that will likely be made therefore, will be write off part or the whole of the ring fenced debt, provide a Tenant with time to pay any ring fenced debt (the Act provides for a maximum period to repay of 24 months), or make no concession at all, in which case the full debt shall be due immediately.
When dealing with ring-fenced debts, Landlords and Tenants will, therefore, need to keep in mind the following:-
- The Act is not a “Tenant’s get out of debt free” card. The default position is that a Tenant should pay ring-fenced debts where they can afford to do so, even if that means paying the debt off over time.
- If an agreement has already been reached between the Parties regarding the payment of ring-fenced debts, the Act does not provide a means to unravel such agreements, rather those agreements will remain in place.
- The protected period is not the same for every business.
- Debts that have accrued outside the protected period will not be caught by the Act. This applies to debts that arose before 20 March 2020, and after the expiry of a relevant protected period.
- Disputes regarding ring-fenced debts will not automatically be referred to arbitration, rather one or both of them will need to take positive action and refer the matter to arbitration.
- If a debt claim has been issued on or after 10 November 2021, but before 24 November 2022, in relation to a debt that is a ring-fenced debt, a party (which includes a Landlord, Tenant or Guarantor) can apply to the Court for an order staying the proceedings, to enable the dispute to be resolved, either by arbitration or otherwise, and the Court must grant the application.
- Parties have 6 months from and including 24 March 2022 to refer a dispute to arbitration, though there is provision within the Act for this period to be extended.
- Arbitrators are likely to decide disputes on paper, unless the Parties ask for an oral hearing.
- The default position will be that the Parties have to pay their own costs of the arbitration process.
- Awards will not be confidential, unless the Parties expressly request that they be confidential.
Parties can, and should, still try and resolve any disputes concerning ring fenced debts, before referring a dispute to arbitration. A negotiated settlement may, for some, feel like they are ‘giving in’, but it provides certainty, and will avoid what could be the substantial, likely irrecoverable costs, associated with the new arbitration process.
If you have any queries arising from the above, or would like to suggest a topic for a future article, please contact Chris Drinkall on 01482 337367 or firstname.lastname@example.org/">email@example.com Chris can also be followed on Twitter at @drinkall_chris and on LinkedIn.