March 10, 2022
On 9 November 2021, the Government published a new Code of Practice for commercial property relationships following the Covid-19 pandemic and the Commercial Rent (Coronavirus) Bill was introduced to the House of Commons. The government intends to pass the bill by 25 March 2022, subject to parliamentary approval.
The aim of the bill is to provide an arbitration back-stop for when Landlords and Tenants are unable to reach an agreement on how the tenant’s rent arrears should be dealt with, that have accrued during periods of enforced closure.
When passed, the bill will provide a 6-month breathing space and extend restrictions on enforcement action by landlords, during which a compromise agreement can be reached, or binding arbitration can be invoked.
Why does the bill matter?
Many business tenants are still struggling to pay rents due against their properties, incurred during the periods of lockdown in 2020 and 2021. Landlords, similarly, are struggling to recover rents for property and services provided to their tenants.
During this protected period, tenants who are unable to pay their rent on commercial premises due to debt or cashflow issues caused by coronavirus should attempt to reach a settlement agreement with their landlords. If they fail to do so, parties can join an arbitration process.
What payments does the bill cover?
The bill creates the concept of a ‘protected rent debt’, which considers rent to be protected if:
- the tenancy has been ‘adversely affected’, by the force of closure of whole or part of their business premises due to requirements imposed by coronavirus regulations; and
- the rent accrued during ‘the protected period’.
In England, ‘the protected period’ runs from 21 March 2020 and ended on or before 18 July 2021, depending on the closure requirements or specific coronavirus restrictions for that particular business.
What is included within the definition of ‘rent’?
Rent, in relation to a business tenancy, means an amount payable by the tenant to the landlord, for possession and use of the property. Rent includes VAT, interest on unpaid amounts and service charge, which in turn often includes insurance charges.
However, the bill shall consider rent that has already been paid, rent arrears incurred before 21 March 2020 and after 18 July 2021, and any rent arrears incurred by tenants whose businesses were not forced to close (and will therefore fall outside the scope of the bill) to be ‘unprotected rents’. In these circumstances, landlords will be able to exercise their usual remedies.
What is the effect of the bill on Rent Deposits?
Previously, failure to make good a rent deposit was considered a breach of the lease and ran the risk of an application for forfeiture. That all temporarily comes to an end under the bill, as deposit funds pulled down and not topped back up, are now considered to simply replace unpaid rent, and hence have the protection of the moratorium.
Does the bill impose restrictions on action to enforce payment of protected rents?
Yes, from the passing of the bill a temporary moratorium is introduced, prohibiting the following enforcement methods:
- Issuing court proceedings to recover debt (these provisions apply from 10 November 2021);
- exercising CRAR;
- forfeiture for non-payment of protected rent;
- drawing down on a rent deposit (where a drawdown has occurred before the Bill is passed, the tenant is not required to top up the rent deposit);
- presenting a winding up petition against a business tenant; and
- presenting a bankruptcy petition against an individual commercial tenant where a statutory demand was served on or after 10 November 2021.
If a settlement cannot be reached and arbitration is invoked, what does that mean, and what will the arbitrator consider?
The arbitrator will decide whether the tenant should receive relief from payment of the protected rent debt, whilst striking a balance between preserving the viability of the tenant’s business on the one hand, but also preserving the landlord’s solvency on the other. The arbitrator will have the power to dismiss a reference or to award a relief from payment. Relief can include writing off all or part of the outstanding sums, reducing interest payable or extending the time to pay in instalments. However, any arrangement directed by the arbitration cannot exceed a period of 24 months.