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Commercial Rent (Coronavirus) Act 2022: What landlords and tenants need to know

Walker Morris’ Real Estate Litigation specialists, Martin McKeague, David Manda and Lewis Couth, explain the new Commercial Rent (Coronavirus) Act 2022 and what it means for landlords and tenants still dealing with Covid-related commercial rent arrears.

Newsflash: Important changes impact landlords’ ability to recover Covid-related/non Covid-related commercial rent arrears

The Commercial Rent (Coronavirus) Act 2022 (CR(C)A 2022) received Royal Assent and came into force on 24 March 2022.

Major restrictions on landlords’ ability to recover commercial rent arrears imposed by section 82 of the Coronavirus Act 2020 (CA 2020) came to an end in England on 25 March 2022. (SI 2022/348 extends those restrictions to 24 September 2022 in Wales.)

Together, what do these important changes mean for landlords and tenants still dealing with Covid-related and non Covid-related rent arrears?

Commercial Rent (Coronavirus) Act 2022

The CR(C)A 2022 ring fences certain rent arrears (“protected rent debts”) and imposes a new moratorium which prohibits enforcement action by landlords where their tenants’ businesses were subjected to legally enforceable Covid-related closures. The CR(C)A 2022 also mandates an arbitration process to resolve disputes as to the ability of a tenant to pay protected rent debts.

Unpaid rent (including service charge, insurance rent, VAT and interest) is a protected rent debt if the tenancy was “adversely affected by Coronavirus” and the rent is attributable to the “protected period” applying to the tenancy.

A tenancy will be adversely affected by Coronavirus if the whole or part of the business carried on by the tenant at or from the premises comprised in the tenancy, or the whole or part of the premises, was subject to a closure requirement during the period beginning on 21 March 2020 and ending on the earlier of: the last day the business or premises were required to close or were subject to regulation as to how the business was run or the way the premises were used; and in England, 18 July 2021 and in Wales, 7 August 2021 (that is, the protected period).

Effect on landlords’ remedies

Commercial rent arrears other than protected rent debts are not protected under CR(C)A 2022 and are no longer subject to the moratorium imposed by CA 2022. Therefore, all of a landlords’ usual remedies in relation to commercial rent arrears which are not protected rent debts under CR(C)A 2022 are now available once more [1].

The CR(C)A moratorium will prevent enforcement action being taken in relation to protected rent debts for six months (that is, until after 24 September 2022) or, where the arbitration process has been instituted within that time, until after the arbitration process has concluded.

During this new moratorium, landlords will not be able to issue debt claims, draw down on any rent deposit, initiate the Commercial Rent Arrears Recovery (CRAR) process, forfeit the lease, enforce any money judgments already obtained in respect of protected rent debts, appropriate rent payments in any way which prioritises protected rent debts over other rent debts, issue winding-up or bankruptcy petitions, nor institute any other tenant-insolvency procedures.

Arbitration process

Where the landlord and tenant have not been able to reach agreement as to the payment of protected rent debts, the CR(C)A provides that either party may serve notification to the other of their intention to make a reference to arbitration. The notification should include a proposal for settlement of the arrears with supporting evidence. The other party will then have 14 days within which to respond, either by accepting the proposal or by making a counter-proposal with supporting evidence. If settlement still cannot be achieved, the parties will then have the option to request a public hearing for the arbitration [2].

The arbitration will resolve disputes based on the ability of the tenant to pay protected rent debts. The arbitrator’s decision should have regard to the principles that any award should be aimed at preserving or restoring the viability of the tenant’s business, so far as that is consistent with preserving the landlord’s solvency; and that the tenant should be required to meet their obligations to the landlord, so far as this is consistent with the preservation of the viability of the tenant’s business.

The arbitrator should assess the assets and liabilities of the tenant [3], the tenant’s rent payment history under the tenancy, the impact of the pandemic on the tenant’s business, and any other information relating to the financial position of the tenant that the arbitrator considers appropriate.

The government’s code of practice for commercial property relationships following the Covid-19 pandemic (the Code) provides that it is relevant to consider whether, protected rent debt aside, the tenant has, or will in the foreseeable future have, the means and ability to meet their obligations and to continue trading. If the tenant has failed to pay any rent since Coronavirus restrictions were lifted, this may be evidence that the tenant’s business is not viable. The government’s draft statutory guidance suggests (non-exhaustively) that the arbitrator may wish to consider management accounts, gross and net profit margins, the tenant’s liquidity ratio, bank account information and profit margins as useful indicators of viability.

The arbitrator may award a full or partial write-off, deferral of payment of the protected rent debt for up to 24 months, or no concession and full payment to the landlord.

Whichever party makes the reference to arbitration reference must pay the arbitrator’s fee upfront, but the fee is then split 50/50 between the parties (unless a party behaves unreasonably, in which case the arbitrator has a discretion in relation to payment of his or her fee), and each party bears its own costs of the arbitration.

How we can help

Walker Morris’ specialist Real Estate Litigators are experienced and expert in acting for both landlords and tenants and can assist clients with pursuing commercial rent arrears claims, negotiating settlements and/or making referrals to, and the conduct of, the new Commercial Rent (Coronavirus) Act 2022 arbitration process.

If you would like any advice in connection with pursuing or defending a commercial rent arrears claim, if you have any queries regarding the CR(C)A 2022 and how this may affect your position, or if you would like information or assistance in relation to any other arrears-related remedies, please do not hesitate to contact Martin McKeague, David Manda or Lewis Couth.

 

[1] note: restrictions on the issue of winding-up petitions under the Corporate Insolvency and Governance Act 2020 (CIGA) will end on 31 March 2022, meaning that any statutory demand served by a landlord in respect of commercial rent arrears from that date will once again have the ‘teeth’ that were lacking while the CIGA restrictions remained in place. Also note (again) SI 2022/348 extends section 82 CA 2020 restrictions to 24 September 2022 in Wales.

[2] The Department for Business, Energy & Industrial Strategy has published a list of approved arbitration bodies, which can be accessed here.

[3] this should not include the ability of the tenant to borrow money or rely upon a guarantor, but it can include the financial position of the corporate group if the tenant is a subsidiary.

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Martin
McKeague

Partner

Real Estate and Housing Litigation

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David
Manda

Director

Real Estate Litigation

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'+44 (0) 113 283 4494

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Lewis
Couth

Director

Real Estate Litigation

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0113 399 1745

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