Commercial Rent (Coronavirus) Bill

In many instances this led to commercial tenants being unable to operate and, in turn, to arrears in rent and other sums payable by tenants to their landlords under their leases.

In addition, commercial landlords have been prevented from taking action against their commercial tenants for non-payment, with forfeiture and insolvency proceedings placed on hold, as well as restrictions placed on their ability to use the Commercial Rent Arrears Recovery (CRAR) and debt proceedings generally (although interestingly two cases were to be heard before the Court of Appeal last month to consider a landlord’s ability to recover commercial rent arrears during the Covid 19 pandemic period).

Current proposals suggest that these restrictions will be lifted on 25 March 2022 and will be replaced, but only in part, by the Commercial Rent (Coronavirus) Bill.

What is the purpose of the Commercial Rent (Coronavirus) Bill?

Whilst we are aware of many commercial landlords and tenants having reached agreements in connection with arrears, there is a substantial number of tenants who still remain in arrears with no agreement in place for payment.

The Commercial Rent (Coronavirus) Bill proposes to provide a binding arbitration service where landlords and tenants of business tenancies have been unable to reach agreement on non-payment of arrears.

Importantly, this service is only available to landlords and tenants (their guarantors and former tenants where being pursued by landlords) where the tenant has been impacted by government enforced closures. Consequently, this is likely to be available to landlords and tenants in the hospitality sector and will extend to cinemas, sports and garden centres and hair and beauty salons. It is not going to be available to landlords and tenants of offices or the likes of essential retail as they were not forced to close.

What is the objective?

The objective of the Bill is said to preserve the viability of a tenant’s business whilst protecting the solvency of the landlord.

Arbitrators and their powers?

It is anticipated that accountants may be best placed to act as arbitrators given the need to assess the viability and solvency of a landlord and tenant.

Significantly, it is proposed that arbitrators will be given powers to write off arrears completely or defer payment of arrears for 24 months. Arbitrators will be required to follow a Code of Practice attached to the Bill.

How will it work?

The Bill is to apply to arrears (rent, service charges, insurance rent, interest and VAT) that accrued during the protected period, beginning with 21 March 2020 and ending on the earlier of:

• The last day on which the premises, at which the tenant carries on its business, was affected by a closure requirement or a specific coronavirus restriction; or
• 18 July 2021.

In a manner somewhat similar to the restrictions previously imposed by the Government, these arrears will be ring-fenced with a moratorium being introduced in respect of certain methods of enforcement by a landlord.  This moratorium will remain in place until:

• The conclusion of the arbitration process; or
• Where no reference to arbitration is made, the date falling  six months after the date on which the Bill is passed.

The effect of the above is that restrictions will continue in place in connection with such arrears to prevent a landlord from issuing court proceedings for the arrears (and any existing proceedings may be stayed to allow for arbitration instead), using CRAR or forfeiture. It will also prevent a landlord from using a tenant’s rent deposit or initiating certain insolvency proceedings.

Of note however, it is anticipated that from 25 March 2022, a landlord will be free to exercise their usual remedies for non-payment where any of the following apply:

• A tenancy is not a business tenancy (and there is uncertainty as to what is meant by a business tenancy in the Bill);
• There was no forced Government closure placed on the tenant;
• The arrears fall outside the protected period;
• The arrears otherwise fall outside of the Bill (because for instance a reference was not filed with an Arbitrator within 6 months of the Bill coming into force).

Concerns

Commentators, including the Property Litigation Association, have raised and filed concerns as to the viability of the arbitration scheme. Indeed, the Bill is in its early stages so, whilst the Government is hoping to implement the Bill on 25 March 2022, we await to see it in its final form.

Of particular concern is:

• the relatively short period of time to pass the Bill, find arbitrators (the Government estimates the need for 1,236 arbitrators) and then implement an arbitration process with very short timescales;
• the scheme will apply equally to huge multi-national tenants as it will to your sole trader therefore there is a concern as to the proportionality and costs;
• landlords and tenants will be obliged to disclose sensitive financial information in the arbitration in connection with their viability and solvency and Awards will be public. Whilst redaction ought to be available this does raise the concern of businesses closing prematurely if credit facilities are withdrawn by suppliers;
• the Bill lacks clear definitions (for instance what is the definition of a ‘business tenancy’ and in what manner is a reference to be filed before the 6 month time limit expires?) and clear guidance for arbitrators to follow which could lead to disparity in the decisions reached by Arbitrators.

Why is this important?

It is essential that both landlords and tenants are aware of the impending changes to the remedies available for non-payment of rent and that they quickly consider whether any particular arrears fall to be dealt with under the arbitration scheme or will fall back to being dealt with under the usual landlord remedies.

If you have any queries in relation to the introduction of the Bill, or wish to discuss any other aspect of property litigation, please click here.