The Covid-19 pandemic had a significant impact on the entire country, to include the full gambit of commercial enterprises from large corporate entities to SME’s and micro businesses. The various restrictions imposed throughout the pandemic led to many businesses being forced to close, or their businesses suffering from disruptions caused by restrictions on how they could trade.
Those restrictions caused an unprecedent financial impact on a number of businesses.
The government introduced a range of measures aimed at assisting businesses from the Furlough scheme, to making available a series of loans and grants. However, in addition to this, it also restricted the steps that creditors and in particularly landlords could take to recover debts, including commercial rent arrears. Those restrictions varied and were consistently extended during the pandemic.
The government has now brought into force the new Commercial Rent (Coronavirus) Act 2022 (“The Act”). This article seeks to explain the key changes brought in by the Act.
The implementation of the act follows efforts made to try and encourage tenants and landlords to, as far as possible, reach agreements on how to manage the build-up of commercial rent arrears during the pandemic. This included the introduction of a code of practice, which provided a non-binding framework for the parties. That code was originally brought in on 19 June 2020 and was subsequently updated on 6 April 2021.
The government has already brought out an updated code of practice which takes into account the provisions of the Act, called the Code of Practice for Commercial Property Relationships published on 9 November 2021 (“The New Code”)
The Act will also be supported by Statutory Guidance for Arbitrators the draft of that guidance has already been published and the final version will likely be published with the new legislation. (“The Guidance”)
The Aims of the Act
The government has made clear that its ambition is to ensure that it protects those viable businesses which have been impacted by the Covid-19 pandemic. However, in doing so it seeks to balance the imperative of ensuring that the solvency of landlord creditors is as far as possible preserved.
The Act does the following:
- Sets out the clear ambit of debt which will remain protected and falls within the scope of the Act – “Protected Rent Debt”. In clearly setting out what is protected it also provides clarity on what debt is unprotected and in turn the debt that Landlords are not restricted from taking recovery action in respect of.
- Creates a new Moratorium Period which extends restrictions on the actions that Landlords can take in respect of Protected Rent Debt.
- Introduces a binding Statutory Arbitration Scheme.
What debt remains protected under the Act ?
The Act provides a recognition of the fact that not all accrued commercial rent debt should be treated in the same way. In seeking to protect businesses that were impacted by the pandemic, a line has to be drawn. The Act provides a detailed definition of what is still protected. In summary the criteria is as follows:
- The debt must relate to a business tenancy – The Act defines a business tenancy with reference to Part II of the Landlord and Tenant Act 1954.
- The debt must fall into one of the following categories:
- An amount payable for possession and use of premises and or
- An amount payable for service charges and or
- An amount payable for interest due on either of the sums in a or b above
- Where a landlord has drawn down from a rent deposit to pay rent the obligation to top up the deposit can be treated as a relevant debt
The above for ease are treated as rent debts.
- The tenancy has to be adversely affected by coronavirus – A tenancy will be regarded as being adversely affected if the business was subject to a closure requirement at or after 2pm on 21 March 2020 and ending on 11.55pm on 18 July 2021 (for premises in England).
- The sums due must be due in relation to a period that is regarded as within the protected period.
What is the Protected Period ?
The Protected Period starts on 21 March 2020, but its end date will vary depending on the precise sector the business falls within and when the closure or other specific coronavirus restrictions came to an end for that sector. The ultimate end date is 18 July 2021, but many sectors have an earlier end date.
Appendix A of the New Code provides a useful diagram which details the various end dates per sector. I have summarised those dates below for ease:
End Date of Protected Period
Hospitality & Nightclubs
18 July 2021
12 April 2021
13 May 2020
18 July 2021
18 July 2021
Hotels and B & B’s
18 July 2021
Self-Contained Tourist Accommodation
12 April 2021
Indoor Leisure (Gyms)
18 July 2021
12 April 2021
Theatres & Cinemas
18 July 2021
Large Events Venues
18 July 2021
The key point for landlords to note is that where rent or other sums have accrued prior to 21 March 2020, or after 18 July 2021, they are not covered by the protections the Act now provides.
The government has made it clear that such debts should be paid, although the New Code encourages a global approach to negotiations between parties ultimately the end of most of the pre-Act restrictions on 25 March 2022 (insolvency restrictions on 31 March 2022) means that, in general, landlords are free to take recovery action in respect of those unprotected rent debts.
The New Moratorium
Where rent debts are classified as within the ambit of the Act and protected, a new moratorium has been brought in to limit what Landlords can do. The Moratorium period has been set as 6 months from when the Act was brought into force. However, the government has reserved the ability to extend this period.
During the Moratorium Period a Landlord cannot in respect of Protected Rent Debts:
- Make a debt claim in civil proceedings (including bringing a counterclaim) – If a claim has been brought on or after 10 November 2021 but before the Act came into force those proceedings can be stayed by the court. It should be noted that this restriction against making civil claims extends beyond the actual tenant to any party who has guaranteed the obligations of the tenant, provided an indemnity, or a former tenant who may be liable.
- Use the Commercial Rent Arrears Recovery Power (CRAR).
- Enforce a right of re-entry, or to forfeit the lease.
- Use a tenant’s deposit to pay against Protected Rent Debt.
- Take winding up or bankruptcy action against the tenant. This limitation also applies to guarantors, those who have provided indemnities and former tenants.
- A lease may provide for a matter to be referred to Arbitration pursuant to an arbitration clause. The restrictions prevent the parties from using those separate Arbitration proceedings which are different from the Statutory Arbitration provided for in the Act, unless both parties agree.
- There are also restrictions in respect of how payments can be allocated by landlords with the general approach being payments should be allocated against unprotected rent debts first.
The New Arbitration Scheme
The Act sets out the details of a comprehensive new Arbitration Scheme, further details are provided in the Guidance.
Either the Landlord or Tenant may trigger use of the Arbitration Scheme within 6 months of the New Act coming into force. Again, this period can be extended by the government.
One of the first decisions for Landlords to take will be whether they decide to trigger the scheme, or hold out and see if a tenant does so.
Essentially the use of the scheme can lead to an award by an Arbitrator or panel of Arbitrators which does one of the following things:
- Writes off the whole or any part of the debt.
- Gives time to pay the whole or any part of the debt. If time to pay is given whether that is to be done in instalments, or otherwise the maximum time allowed should be 24 months.
- Reduces the amount of interest which needs to be paid.
- Determines actually not to provide any relief from payment.
The Act creates a clear process for dealing with an Arbitration. The Guidance describes it as a three-stage process. Essentially the core elements of the process are as follows :
Stage 1 - Pre-Arbitration Stage
Submission of Letter of Intention – This can be sent by either the Landlord or the Tenant.
The Respondent has 14 days to respond to a Letter of Intention.
- The Formal Referral – This is triggered by sending a formal proposal in respect of the Protected Rent Debt along with supporting evidence to both the other party and to an authorised Arbitration Body. The Arbitration Body will appoint an Arbitrator or panel of Arbitrators to deal with the matter.
- The Respondent is permitted to submit a response containing a counter proposal within 14 days. Again, the counter proposal must be supported by evidence.
- Either party has an opportunity of submitting revised proposals.
Stage 2 – The Arbitrator’s Assessment of whether the dispute is eligible for Arbitration
During this stage the Arbitrator will check whether the parties have already reached a binding settlement regarding the debt being referred. If they have, the Arbitration should be dismissed. Further he/she will ensure the sums being referred are Protected Rent Debts which are covered by the Act.
Finally, the Arbitrator will carry out an assessment of the viability of the tenant’s business.
If the Arbitrator determines that:
- The tenant’s business is not viable and
- The tenant’s business would not become viable even if the tenant were given relief from payment of any kind e.g. that even if the whole protected rent debt was waived the business would still not be viable.
Then the Arbitrator must again decide at this stage to dismiss the arbitration.
This early viability assessment in the second stage reiterates the aim of the Act, which is to ensure that viable businesses are protected.
Stage 3 – The Arbitrator’s Assessment of the matter of relief from payment of a Protected Rent Debt.
Essentially during this final stage, the Arbitrator will determine what if any relief should be provided. In making that decision the Arbitrator has to apply the principles set out in s.15 of the Act. In short, those principles require the Arbitrator to balance the desire to restore or preserve the tenant’s viability, as against the preserving of the solvency of the landlord.
The Act and the guidance detail the kind of evidence the Arbitrator should expect to see and consider when carrying out the balancing act.
The proposals made by the parties form an essential part of the process, with the Arbitrator essentially tasked with selecting the proposal which is most consistent with the principles.
For landlords the failure to submit a proposal, or to engage in the process at all, could be devastating and lead to a tenant’s proposal, so long as it is consistent with the s.15 principles, being accepted.
Any award made, subject to the rules relating to appeals and challenges is binding on the parties.
Summary and Comment
The Act provides a clear framework for the resolution of outstanding commercial rent debts.
Critically for landlords, the distinction between protected and unprotected rent debts, means it is open to them to stop the rot by requiring tenants who have simply stopped paying any sums to start to at least pay the ongoing rent sums due. The New Code makes it clear that those tenants that can pay should pay. Tenants who refuse to pay the ongoing rent run the risk of facing recovery action. In addition, that failure to pay, even after the release of restrictions may raise the real question of whether the tenants business remains viable.
Landlords must quickly get to grips with the new Arbitration process and be ready to both trigger and more likely respond to the same. For Landlords the key to the process will undoubtedly be based on having sufficient financial information about the tenant in order to frame a reasonable proposal. Further, ensuring the Arbitrators have enough evidence before them to properly assess the tenant’s viability and what they can afford to pay.
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