In response to the pandemic and in a bid to protect businesses, the economy and jobs, since March 2020 the government has put in place various measures to help business tenants that had been impacted by covid.
These radical emergency legislative measures have largely centred around restrictions on remedies available to landlords, which in practice has prevented landlords from terminating leases by changing locks, sending around enforcement agents or winding-up business tenants which are in debt.
These restrictions have driven a spike in the number of debt claims issued in court – which is one of the few remedies that has not been restricted – while also encouraging landlords and tenants to reach settlements outside of court, including measures such as rent cessation periods and rent suspensions.
The Commercial Rent (Coronavirus) Act 2022 came into force on March 25, 2022 and brings into law a new arbitration process for certain protected debts. For non-protected debts, various remedies have now become available again to landlords. For at least the next six months, we are likely to see new approaches – and in some instances the return of old approaches – new trends and new considerations when it comes to enforcing the terms of commercial leases.
It’s important to keep in mind that remedies available will depend on whether the debt is a protected debt or a non-protected debt.
A protected debt is a debt that meets certain criteria in relation to the type of tenancy, the nature of the tenant’s business, the viability of the tenant’s business and the periods for which the business was subject to compulsory closure. Rent, service charge, insurance, VAT, interest and rent deposit top-ups can all fall within the scope of the new protections.
For protected debts, there will now be a moratorium period until at least September 24, 2022 where tenants are protected from all landlord remedies. The new legislation brings about a process of ringfencing certain pandemic arrears that fall within the definition of a protected debt and provides a means of resolving related disputes.
If arrears under a commercial lease do not fall within the definition of protected debt, landlords will have the full suite of remedies back at their disposal going forward.
What tenancies does the new legislation apply to?
The new legislation relates to business tenancies covered by Part II of the Landlord & Tenant Act 1954 including leases, underleases and contracted-out leases. It does not apply to licences to occupy and tenancies at will.
For tenants occupying business premises in England, the protected period is from March 21, 2020 until the last day on which the tenant faced sector-specific government restrictions.
Keep in mind that if rent has fallen due outside of the protected period, then the new restrictions may not apply at all, but if the missed payment falls within a time that the business was forced to close due to government intervention, you are likely looking at a protected debt for that period.
The new legislation and new restrictions do not apply if the parties have already reached agreement in relation to what would otherwise be protected liabilities.
What remedies are now restricted?
For protected debts during the moratorium period, all enforcement methods will be prohibited. Commercial landlords will not be able to sue for arrears, exercise CRAR, forfeit for non-payment of rent, seek to terminate leases or oppose renewals on the ground of persistent delay in paying rent, use rent deposits, appropriate payments made by tenants to protected periods or commence insolvency proceedings where the arrears concern protected debt only.
An arbitration award will amount to an effective lease variation and so landlords will similarly be restricted from enforcing against guarantors, former tenants or any third party that may be liable on an indemnity basis.
The arbitration process
The arbitration process envisaged by the legislation is a streamlined process, so we are unlikely to be looking at detailed legal submissions. A series of proposals and counter-proposals from landlords and tenants, supported by evidence, is more realistic.
While the process is intended to be streamlined, there is scope for delays if an arbitrator has to consider issues such as viability of a tenant’s business, solvency of a landlord or whether the debt is protected at all.
As part of the decision-making process, the arbitrator has the power to award a full or partial write off, defer some or all of the debt on terms for up to 24 months or can order a nil concession. The award will be final and binding with only very limited scope to appeal.
The process is not likely to be concluded any sooner than six to eight weeks, however for some matters, the parties may be looking at several months.
The party applying to the arbitrator is the party that will pay the arbitrator’s fees initially, although the arbitrator will be able to later order the other party to pay half of that fee. However, each party will have to bear their own costs of the arbitration process including all legal costs.
Dealing with a non-protected debt
The new restrictions will be irrelevant for arrears that are not protected, and the full range of landlord remedies that were available prior to March 21, 2020 will be restored.
We may now start to see a wave of forfeitures, appointments of enforcement agents and presentation of winding-up petitions now that these remedies have all become available again.
For protected debts, only time will tell how great the arbitration uptake is. Many parties may be put off by the costs involved, proportionality or the publishable nature of the determinations.
We may see some landlords tactically applying to appoint an arbitrator with a view to achieving a better outcome than a CVA-compromised rent, while tenants may leave it until the very last minute to appoint an arbitrator in a bid to extend the moratorium period.
In some instances, we could be looking at a significant build-up of arrears over a period of up to 16 months, so rather than risk what could be a severely adverse arbitration determination, we expect to see parties putting forward realistic proposals for resolution. We expect this will result in many disputes over protected arrears settling long before any arbitration determination.
Daniel Long is a director at WHN Solicitors and heads up the firm’s commercial department and property disputes team.
Daniel principally specialises in resolving disputes between landlords and tenants of commercial leases on matters including rent and service charge recovery, dilapidations, forfeiture, possession, insolvency-related matters, and lease renewal and termination.
For advice on how the new rules could help you recover commercial rent arrears from a tenant, contact Daniel on 0161 761 8063 or email him at [email protected]