Commercial Rent Arrears – the end of the moratorium:23-03-2022
The current moratorium has prevented landlords from evicting tenants and has prevented the forfeiture of business leases. This moratorium is due to end on 25th March 2022 and the new Commercial Rent (Coronavirus) Bill (“the Bill”) is scheduled to be passed into law the same day. The restrictions on the use of winding up petitions are also set to ease after 31st March 2022.
The ending of the moratorium will raise the hopes of landlords owed rent; however, the Government is eager to ensure that landlords’ actions are proportionate and want to minimise further disruption to the economy. The Bill therefore sets out a new arbitration process for commercial landlords and tenants to agree the repayment of rents which fall into the category of ‘Protected Rent Debts’.
Protected Rent Debts:
This applies to:
- Rents reserved under a commercial lease (inc. insurance rent, service charge, VAT and interest), which fell due between 21st March 2020 and 18th July 2021 (‘protected period’).
- Rent debt incurred by tenants who were adversely affected by Covid-19 i.e., were mandated to close their premises/ business, either in whole or in part, under the Covid-19 regulations.
- Those who lease their premises under a business tenancy as defined by Part II of the Landlord and Tenant Act 1954 (applicable to most business tenancies).
For protected rents, the Bill introduces a new mandatory arbitration process intended to find a solution which suits the landlord and tenant, while also protecting jobs and future commercial relationships. Where agreement between the parties cannot be reached and arbitration is sought, landlords (and tenants), will have six months from the date the Bill is passed to apply. Landlords are not to draw down from rent deposits to cover protected rent arrears.
The arbitration process:
Either party can make a reference to arbitration. Prior to doing so, the referring party must write to the other party setting out their intention to apply for arbitration, which should include a settlement proposal relating to the unpaid protected rent debt. The other party then has 14 days to reply and can put forward a counter-offer relating to the rent debt.
A party cannot make a reference to arbitration until 14 days after a response (if any) is received, during which time they can consider any counter proposals put forward. After those additional 14 days (or 28 days from the date of the notification if no interim response was received), either party can apply for arbitration. The application must include a proposal for settlement, with evidence in support attached. The other party can submit a counter proposal. The arbitrator will then make an award on paper, or at a hearing if requested.
A reference to arbitration must be made within 6 months of the Bill being enacted. As this is anticipated to be passed on 25th March 2022, referrals must be made by no later than 25th September 2022. The period for reference to arbitration can be extended by the Secretary of State.
Awards that can be made by an arbitrator:
It is uncertain as to what awards an arbitrator is likely to make. However, the Bill sets out key principles which an arbitrator must consider when making any award. These include:
(i) Preserving the viability of the business of the tenant so far as such is consistent with the landlord’s business and solvency;
(ii) Whether a tenant can meet its obligations regarding the rent arrears in full and without delay;
(iii) Whether or not any award can be paid by way of instalments. The maximum time a tenant must pay an award is 24 months after the arbitration decision; and
(iv) How the costs and expenses of the arbitration will be paid.
The arbitrator is obliged to choose the option that is most likely to preserve the tenant’s business, but also the landlord’s solvency. The arbitrator must publish the award and the reasons for it. Any award made by an arbitrator is then binding upon the parties. Arbitration cannot be used where the liable tenant is already subject to a CVA, IVA or scheme of arrangement in respect of that debt.
Non-protected rent debts:
This applies to:
- Rent arrears which accrued outside the period of 21st March 2020 to 18th July 2021.
Arrears accrued within the protected period, but during the times where the tenant’s business was not forced to close.
Landlords in cases where there were no restrictions on a tenant’s business will be able to take advantage of the usual remedies. The various options available at the end of the moratorium include:
- Enforcing a right of re-entry or forfeiture.
- Issuing a debt claim in civil proceedings against the tenant for the rent arrears and enforcing the judgment against the tenant’s assets stored at any of its premises.
- Draw on a rent deposit.
- Agree a re-payment plan.
- Appoint bailiffs in the County Court to enter the property and seize the tenant’s assets to the value of the arrears (CRAR).
- Pursue a former tenant/ guarantor, where applicable.
- Serve a statutory demand and commence insolvency proceedings (after 31st March 2022).
It would be sensible for Landlords who intend to pursue unprotected rent debts to include reference in their claim highlighting that the sums do not fall within the protection of the Bill.
For more information, please do not hesitate to contact us and ask for the commercial litigation team.