Covid rent arrears – Where are we now?

11th November 2021

Following our previous publications on the extension of the moratorium on the forfeiture of commercial leases for non-payment of rent, and the Government’s proposed binding arbitration process, the Government published, on 9 November 2021, the Commercial Rent (Coronavirus) Bill (the Bill) together with a new Code of Practice.

The Bill sets out the proposed next steps for dealing with the estimated £7bn in rent arrears that have accrued over the course of the COVID-19 pandemic. It is intended to be enacted on 25 March 2022, coinciding with the end of the current moratorium.

The stated intention, reiterated by the Business Secretary, Kwasi Kwarteng, is for landlords and tenants to resolve their disputes by agreement. Equally the government expects “tenants capable of paying rent to do so”.  The code of practice which has been in place to date, the Code of Practice for the commercial property sector during the Covid-19 pandemic, has had limited impact and there is therefore a risk that the arbitration process may be overwhelmed by the number of referrals and a lack of available arbitrators.

The Bill proposes to ring-fence “Protected Rent Debts” and provides a legally binding arbitration process in circumstances where landlords and tenants are unable to settle the outstanding arrears.  Ahead of its intended introduction in the Spring of 2022, there is an expansion of the current moratorium to limit a landlord’s ability to make a debt claim including County Court judgments, High Court judgments and bankruptcy petitions, in relation to rents and other sums covered by the new process.

While the Bill remains subject to change between now and March, the headline provisions of the Bill and its impact on both landlords and tenants are set out below.

New moratorium

The Bill provides that a new moratorium, preventing a landlord from making a debt claim in respect of any ring-fenced debt, will be in place from the date the Bill is enacted (expected by the end of March 2022) until either:

1. the period of six months beginning on the day which the Bill comes into force; or
2. where a referral to an arbitrator has been made, the day on which that arbitration concludes.

In the meantime, in relation to any debt claims for ring-fenced debts brought before the new moratorium comes into force (i.e. by end of March 2022) but after 10 November 2021, either party may apply for the proceedings and execution to be stayed and the Court must grant such an application if the moratorium applies.

As currently drafted, it appears that any debt claims issued prior to 10 November 2021 should not be affected.

Once the Bill has been passed, it is intended that the current restrictions on landlord remedies – forfeiture, CRAR, the right to appropriate rent, tenancy deposits, and issuing winding up/bankruptcy petitions on the tenant – will remain in place in respect of Protected Rent Debts.

Rents and other sums to which the Bill applies

The Bill applies to all “business tenancies“, but is limited to rent accrued during those periods that tenants were forced to close (wholly or in part) pursuant to the coronavirus regulations (i.e. the Protected Rent Debts) – arrears that accrued during other periods are not within the scope of the Bill. This would mean that those tenants who elected to close, despite not being obliged to do so, will find that the rents for the corresponding period will fall outside of the scope of the arbitration process.

Rent, for these purposes, is to also include service charges and insurance, VAT, sums payable to top up deposits and interest. Furthermore, claims against tenants are defined as including guarantors.

The protected period for which such rents are ring-fenced is from 2pm on 21 March 2020 to the earlier date of:

• 11:55pm on 18 July 2021 in England and 6am on 7 August 2021 in Wales; or

• the date the specific coronavirus restrictions applying to a tenant’s relevant sector were finally lifted. Such restrictions must be specific to the business carried on at the premises, for example the requirements limiting party sizes in pubs and restaurants, rather than general restrictions, such as social distancing or the wearing of face coverings.

The accompanying Code of Practice provides the examples that for a clothing shop in England the ring-fenced period will run from 21 March 2020 to 12 April 2021, and for a café in England the ring-fenced period will run from 21 March 2020 to 18 July 2021. The Bill does not appear to contemplate multiple protected periods and so it appears tenants can treat the whole of the period through to when they were finally allowed to re-open in Spring/Summer 2021 as a protected period.

Annex A of the Code of Practice covers what restrictions were in place for each industry sector and for what periods.

Binding arbitration process

In respect of any Protected Rent Debts, either the landlord or tenant may make a reference to arbitration within 6 months of the Bill being enacted for relief from payment. Before such a reference is made, notice must be given to the other party. An arbitrator will dismiss an application if the parties reach a settlement, or where there is no Protected Rent Debt or the tenant’s business would not be viable even where relief is granted.

In determining the award to be made, the arbitrator will have regard to:

1. preserving/restoring the viability of the tenants business, so far as this is consistent with preserving the solvency of the landlord; and
2. in determining the above, the following will be taken into account:
   1. the assets and liabilities of the landlord and tenant;
   2. the previous rental payments;
   3. the impact of coronavirus; and
   4. any other information that arbitrator considers appropriate.

It would not, however, appear that the arbitrator would need to consider the outcomes of prior arbitrations, which may result in a lack of consistency in awards.

Awards are to be delivered as soon as reasonably practicable, and within 14 days of any oral hearing, however this may be extended by agreement or at the discretion of the arbitrator.

The arbitrator’s powers are very wide-ranging and include the ability to write off all or part of Protected Rent Debts, together with interest, and deferring payment by up to 24 months from the date of the award.

In terms of costs, while the arbitrator has discretion to award otherwise, the default positon is that the arbitration fee shall be shared equally between the parties, and each party will bear its own legal costs of the arbitration process.

How can we help?

The scope and applicability of the Bill and any subsequent enacted legislation will need careful consideration.  It seems inevitable there will be areas of disagreement as to how it is to be interpreted and applied. Walker Morris’ Real Estate Litigators are experienced and expert in acting for both landlords and tenants, and can assist clients with those issues, as well as with with referrals to, and conduct of, the arbitration process.

If you would like any advice in connection with pursuing or defending a Covid-related arrears claim; if you have any queries regarding the Bill and how this may affect your position; or if you would like advice or assistance in relation to any of the wide range of other arrears-related remedies which currently remain open to landlords, please do not hesitate to contact Martin McKeague, David Manda or Lewis Couth.