This brief update has been prepared for tenants in arrears as The Commercial Rent (Coronavirus) Bill (the “Bill”) is currently making its way through Parliament in March 2022. It will change the current situation regarding pandemic arrears and the ban on certain landlord remedies.
Note that as the Bill is still going through the approval process, it is not yet law. It will only become law once officially enacted, which is expected to be on or before 25 March 2022. It is therefore subject to change and this article has been prepared based on the draft Bill. However, it is understood that it is likely to remain largely the same.
What is the current situation?
Our previous articles (latest one here) explain the different rules and extensions that have been put in place over the last two years to protect tenants in arrears and which types of tenancies they protect.
In summary, the remedies that a landlord has been prevented from exercising against a tenant in arrears are:-
- Forfeiture by peaceable re-entry or Court proceedings. This restriction applies until 25 March 2022. Note that forfeiture for breaches other than non-payment of rent via the “section 146 notice” procedure has always remained available.
- The Commercial Rent Arrears Recovery process (CRAR), similar to the old rules of “distress” enabling a landlord to recover tenant goods in lieu of rent arrears. Whilst this has still technically been available during the pandemic, the timeframe for recovery has been altered from 7 days outstanding rent to 554 days outstanding. This restriction applies until 25 March 2022.
- Statutory demand and winding up proceedings against a company. This restriction applies until 31 March 2022.
What will change?
The Bill will lift the restrictions placed on Landlord remedies for rent arrears throughout the pandemic and seek to restore the pre-pandemic norms. Most notably, it introduces a compulsory binding arbitration scheme for dealing with pandemic-related rent arrears. However, this scheme is not available to all tenants / arrears and is subject to specific requirements being met.
Once the Bill is in force, a six-month moratorium period will come into effect for preventing forfeiture, winding-up, CRAR, and drawing on rent deposits in relation to specific arrears that meet certain requirements. These will be referred to as “Protected Rent Debts” (note that restrictions on rent deposit drawdowns have not previously applied). Any debt proceedings can also be stayed until the arbitration has run its course.
The meaning of “Protected Rent Debts” is key to determine whether this will apply to your arrears or not. If so, then those arrears which fall within the definition of Protected Rent Debt will be ring fenced and subject to the above protections.
For all other overdue commercial rent, including rent falling due now, after the existing restrictions are lifted all pre-pandemic remedies become available again and there is nothing, it appears, to stop landlords from continuing with their pursuit of debt claims, or even drawing down on rent deposits for non-protected rent.
What are Protected Rent Debts?
Protected arrears are those that are due and payable during the ‘protected period’ being from 21 March 2020 to the earlier of the last day that the business was required to be closed under the mandates or 18 July 2021. The Bill includes a schedule which sets out the exact time periods of mandatory closures for each sector. It doesn’t allow for more than one protected period so a hospitality tenant, for example, that was allowed to open but then forced to closed again, can take advantage of the whole protected period.
Protected tenants are those that occupy under a ‘business tenancy’ (in respect of which there’s a specific definition) which has been adversely impacted by the pandemic. A business is deemed adversely impacted if part or the whole of the premises had to close because of a mandate during the ‘protected period’ (above).
Note that there are various elements to the definition of Protected Rent Debt beyond the scope of this note, it is not straightforward and some parts of the Bill as proposed are very grey. Therefore, it is important to get specific advice on your situation.
What is the arbitration scheme?
It is a dispute resolution mechanism which, if initiated by the landlord or tenant, must be followed and the decision by the Arbitrator is binding.
As currently drafted, it must be commenced by a notice being served on the other party together with supporting evidence and proposals for resolving the matter. This notice must be served within 6 months of the date the Bill becomes law. Once commenced, the process is intended to be quite quick with the other party having only 14 days to submit a response / counter-proposals. There is then a 28-day window for the opportunity of revised proposals to be submitted after which the matter is referred to an approved arbitration body.
There is the option of having a public hearing (maximum of 6 hours, which is fairly short), otherwise the Arbitrator will make and deliver its decision in private and in paper form upon considering the proposals and evidence.
In making its decision, the Arbitrator is guided by the “Arbitrators Principles” the aim of which is to preserve the viability of the Tenant’s business but only so far as consistent with preserving the Landlord’s solvency. In considering the viability of the Tenant’s business key considerations include: the assets and liabilities of the business; other tenancies; it’s rent payment history; the impact of the pandemic on its business; and any other information that the Arbitrator considers relevant including whether the Tenant has means and ability to continue trading.
There are no details yet regarding who the approved arbitrators will be.
There are some practical points and grey areas in the rules relating to the arbitration process that are not yet clear and will need to be ironed out.
Will it impact different types of tenants equally?
The short answer is no, unfortunately. As mentioned above, there is a schedule to the Bill outlining the periods of mandated closure for each sector which is key to determining what a Protected Rent Debt is and therefore if arrears will be ring fenced so the tenant has the protection afforded by the Scheme.
For example, office-based businesses that closed following ‘work from home’ guidance will not be caught the scheme as they were not mandated to close, whereas leisure and retail business were under specific mandates and are therefore eligible for the relevant periods.
As currently drafted, it is also understood that landlords and tenants who reached concession agreements won’t be able to utilise the scheme for those arrears. However, there is no clear definition of ‘agreements’ so it could be subject to dispute.
Where the Scheme does not apply, it is just the Code of Practice for Commercial Property Relationships
This won’t become law until the Bill has been officially ‘enacted’. We don’t have any clear indication when that will be yet, but it is assumed to be on or before 25 March 2022. Whilst things could change before then, the Bill is making good progress so far and can be tracked here.
Take specific advice regarding your arrears position so that you can understand your rights and the remedies that a landlord may have against you. Each situation is different and some of the rules are complex and grey, so it is important to get bespoke advice.
If your arrears don’t amount to a “Protected Rent Debt” under the scheme or if your arrears do amount to a “Protected Rent Debt” under the scheme but you would not want to be subject to the arbitration process, then consider alternative solutions now before your Landlord has either a full suite of remedies again or has the option to initiate the arbitration process.
We are here to assist and advise you on your circumstances, feel free to get in touch.
How can Ignition Law help commercial tenants?
We are happy to help and support you, which we can do in a number of ways. In the context of the potential moratorium lift explained above we can:
- Advise you regarding your landlord’s remedial options against you in respect of any arrears and how you can mitigate any risks.
- In the event of any remedial action being threatened or taken by your landlord, help you navigate through the process and review the validity of your landlord’s action.
- Help with settlement negotiations.
- Draft a settlement or surrender agreement.