The Government announced recently that it intends to create legislation to ringfence debt accrued by businesses who were affected by the pandemic and forced to close to prevent otherwise viable businesses collapsing under the pressure of rent arrears recovery action by out of pocket landlords.
The British Property Federation estimates that £7.5 billion of commercial rent was in arrears as at 30 June 2021. Clearly one of the Government’s overriding concerns and objectives is to protect jobs which are threatened by the build-up of arrears during the pandemic.
During the pandemic, landlords have been prevented from seeking evictions for commercial rent arrears and from easily accessing traditional recovery measures such as winding up petitions to try and obtain payment.
While most financial support measures issued in response to the pandemic are now broadly coming to a conclusion or tapering off, the Government appears to consider that landlords’ access to their usual contractual rights and remedies for commercial rent arrears could cause substantial problems for businesses in all sectors. For this reason, landlords cannot expect to have all of the usual options available to them until after the end of March 2022.
While this may feel like more bad news for landlords, the Government’s announcement follows recent decisions in which landlords’ objections to restructuring measures have been overruled. The Government has decided that there will be a new scheme for binding arbitration to be used by landlords and tenants where there are commercial rent arrears. Clearly the Government’s hope is that this will force negotiations and compromise.
In line with the Government’s announcements, the restrictions on landlords’ ability to forfeit continue until the end of March 2022.
Details of the arbitration scheme are awaited, but initial guidance suggests that this will be codified in a strengthened Code of Practice which will set out principles to which arbitrators and parties must adhere. These principles are expected to provide for use of the scheme for non-payment of rent after March 2020 only, in relation to periods of forced closure. Tenants who are able to pay will also be expected to pay.
The new legislation will apply to all commercial rent debt accrued as a result of COVID-19 closure restrictions in sectors which have been impacted. Following the lifting of restrictions, tenants should pay their rent in accordance with the terms of their lease, (unless otherwise agreed with their landlord). If a tenant does not have the means to pay rent in full, it is expected that landlords and tenants will negotiate in good faith by using the principles as a guideline, as set out in the Code of Practice. Those principles will be published into the legislation ahead of the arbitration system coming into place.
The arbitration scheme is intended to be an impartial process and will aim for speedier resolution than will be possible via litigation, however, it remains to be seen if that is the case. Parties will be bound by the decision of the arbitrator, and tenants may have to pay rent debts accrued during the ringfenced period in accordance with that decision.
Other countries such as Australia have similar schemes, but the specific details for landlords and tenants in this jurisdiction are presently awaited.
It should be noted that the Government continues to encourage landlords and tenants to negotiate and find mutually beneficial solutions and considers that the proposed new arbitration scheme will be used as a last resort.
The announcements that commercial rent arrears will be excluded from the tapered relaxation of winding up petition restrictions demonstrates just how significant these debts are expected to be. Clearly, the Government wishes to avoid large numbers of corporate insolvencies attributable to insurmountable issues in dealing with rent arrears arising due to the pandemic, when many businesses saw long periods in which trade was either impossible or greatly diminished.
While landlords continue to find that debts owed to them are seemingly demoted to the lowest priority, and it may not feel like these announcements are consistent with the “we’re still all in this together” message the Chancellor has been keen to promote, the proposed development of an arbitration scheme will hopefully move some way towards encouraging negotiations and possibly addressing the arrears in the context of the return to ‘business as usual’.
It remains to be seen whether the proposed scheme does indeed assist landlords who are still prevented from seeking recovery of significant sums.
For more information about the article above, please contact Warren Reid or a member of our Restructuring & Insolvency team.
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