As discussed in our previous articles, landlords seeking to enforce rent arrears from commercial tenants have faced numerous challenges over the last two years. Since the beginning of lockdown in March 2020, the Government have introduced a number of measures to assist commercial tenants during the pandemic including, but not limited to, suspending a landlord’s right to forfeit a commercial lease if a tenant had accrued substantial arrears.
Over the course of the pandemic, landlords have been encouraged to comply with a Code of Practice (revised several times) and an extension to the moratorium whilst commercial tenants, experiencing the financial effect of coronavirus, have benefited from what amounted to insolvency immunity. With that being said, towards the end of 2021, the Government announced how it envisaged resolution of disputes over commercial rent arrears by publishing the Commercial Rent (Coronavirus) Bill (“the Bill”). In our previous article, we highlighted the key proposals brought forward under the Bill.
On 24 March 2022, the widely anticipated legislation received Royal Assent and took immediate effect as the Commercial Rent (Coronavirus) Act 2022 (“the Act”). Various provisions proposed under the Bill and discussed in our earlier article have since been amended and rewritten under the Act.
The Act contains a number of provisions and consequences that landlords should consider before taking any action to recover rent arrears during the moratorium period. The moratorium period will last for six months after the Act came into force on 25 March 2022, however this may be extended further as recent history has proven. Below, we highlight the key takeaway points from the Act.
The Act covers ‘Protected Rent Debts’ and defines such debt as rent arrears under a commercial tenancy however accrued as a result of the premises being required to close (fully or partially) during a national lockdown.
In practice, the ring-fenced period begins from 21 March 2020 until the last date that the restrictions were removed within that sector, being 18 July 2021 at the latest. The Code of Practice on Commercial Property Relations (“the Code”) helpfully provides guidance as to showing the different time periods of mandated closures by each sector.
Temporary relief for tenants
The Act provides that during the moratorium period, landlords will be prohibited from remedies usually available to them, including:
- issuing debt proceedings,
- CRAR, or
- forfeiture when seeking to recover protected rent debts.
Indeed, in the event that a landlord issued a debt claim on or after 10 November 2021 but prior to the commencement of the Act, the Act allows it possible for a tenant to apply for a stay of proceedings to allow parties to resolve by arbitration or otherwise.
What may be unwelcomed by landlords is that the Act also addressed circumstances where judgment for rent arrears has been entered during this period. If the landlord has entered judgment against the tenant for rent arrears, any amount unpaid under that judgment falls within the scope of protected rent debt. This ultimately means either the landlord and tenant can utilise the arbitration scheme so long as the debt has not been paid.
It is worth noting that the Act does not affect agreements already reached between landlords and tenants.
Under the Act, landlords are also prevented from withdrawing rent deposits to offset against rent arrears. Previously, landlords were not prohibited from drawing down a rent deposit. Any amount that has been drawn down from a rent deposit prior to the Act coming into force will be treated as unpaid rent due and the tenant will not be required to top up the deposit.
Arguably, the most significant provision under the Act is the compulsory arbitration scheme for protected rent debts. Landlords may well be relieved, or somewhat frustrated, to learn that, as envisaged in our previous article, the Act sets out that arbitration is the resolution process available to both landlords and commercial tenants if they have been unable to reach an agreement. Although, in the first instance, landlords and commercial tenants are encouraged to negotiate through the Code, and thereafter refer the matter to arbitration if negotiations fail.
Under the Act, either the landlord or tenant have the right to unilaterally apply for the protected rent debt to be referred to the arbitration scheme. This must be done within the moratorium period.
Again, the Code at Annex C accompanying the Act helpfully provides a flow chart of what to expect from the arbitration process. Briefly, as highlighted in our previous article, the intention is that parties put forward their proposals together with supporting evidence.
The arbitrator will have a wide discretion to determine protected rent debt disputes between landlords and tenants. For instance, the arbitrator may, based on the evidence presented by both parties, decide to write off all or part of the arrears, propose a payment plan for a period of up to 24 months, or perhaps even reduce the rate of interest on arrears stipulated under the lease. The Act confirms that any decision reached by the arbitrator is legally binding and, unlike as put forward under the Bill, will effectively amend the terms of the lease.
In reaching its decision, the arbitrator is obliged to consider a number of principles set out under the Act. This appears to be a balancing act based on preserving the tenant’s business whilst also having regard to the landlord’s solvency. A tenant will not be expected to go into debt to pay the rent.
Another key point to consider is that, unlike as proposed under the Bill, each party will now bear its own costs of the arbitration unless the arbitrator deems it just to decide otherwise. Although, each party will be responsible for their own legal or other costs.
The Government have estimated that 15,500 businesses would be eligible to use the arbitration scheme. However, only time will tell as to whether the arbitration scheme, or indeed the Act, will provide the much needed clarity and path to resolution both landlords and tenants need.
If you need any advice regarding the Commercial Rent (Coronavirus) Act 2022 (“the Act”), contact our expert property litigation lawyers by calling 01202 786226 or by emailing email@example.com.