17 March 2022 by Bradley Ali

Coronavirus and commercial rent arrears – what you need to know

As part of the Coronavirus Act 2020, all landlords have been prohibited since 26th March 2020 from forfeiting their leases due to tenant rent arrears. This is due to come to an end on 25th March 2022. In addition, the prohibition on landlords from issuing commercial recovery or winding-up petitions against tenants who had run up arrears is due to expire on 31st March 2022.

These measures will quite rightly be remembered as a historic intervention put in place during the pandemic to give business tenants some respite and to force parties to seek a fair and reasonable compromise.

However, it is estimated that there will be at least £8 billion in outstanding tenant arrears next quarter, so it is perhaps only fitting that, at the same time as the above restrictions expire, a new arbitration scheme to deal with pandemic related rent arrears (Commercial Rent (Coronavirus) Bill 2021)) will come into force. The Bill’s purpose is to resolve disputes between commercial landlords and tenants for coronavirus pandemic related rent arrears. In addition, there is an updated Code of Practice that provides official guidance on how parties should resolve COVID-19 commercial rent disputes.

The Bill allows for ringfencing of pandemic rent arrears and then establishes a binding arbitration system that will determine what happens to that debt. To qualify, the debt needs to have accrued due to the closure of all or part of the tenant’s business during what is known as the ‘Protected Period’ (i.e. 21st March 2020 to 18th July 2021). In this scheme, service charges, interest on any unpaid amounts, VAT and insurance rent costs all count as rent. By limiting the new scheme to the Protected Period, it means not all tenant arrears will qualify and landlords will be able to adopt their usual methods to seek recovery of those.

The Bill sets out the arbitration process in detail. Either the landlord or tenant may apply for arbitration, but they will need to move quickly. The time limits to refer cases for arbitration will be six months from the enactment of the Bill. It is important to note that the legislation will not interfere with any settlements that have already been reached, however the arbitrators will be able intervene against and cancel money judgments already obtained by landlords.

So whilst the balance of negotiating power is tilting back in favour of landlords for the foreseeable future, by introducing this Bill the Government is hopeful landlords will adopt a reasonable approach for tenants who are still recovering from the impact the pandemic had on their businesses.

The first step for parties to a lease with commercial rent arrears should be having a without prejudice meeting designed to foster an open discussion between the parties. This should encourage them to offer the motivations behind their decisions, to see if a private settlement that strikes a fair balance between the parties can be reached. Such compromises can take the form of rent deferrals or other forms of payment plans to allow the tenant to build up some revenue that can be used to make up the arrears over the longer term.

For advice about commercial rent arrears settlements and other commercial real estate matters please contact Bradley Ali in our Commercial Real Estate team.

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