Government restrictions – the latest developments
The current moratorium on statutory demands and winding up petitions originally due to expire on 30 June 2021 has been extended to 30 September 2021. Following consultation, the Government announced on 16 June that the moratorium on forfeiture would be extended to 25 March 2022. The restriction on the use of the Commercial Rent Arrears Recovery (CRAR) process by landlords will also be extended, however the total number of days’ outstanding rent required for CRAR will remain at 554 days.
The Government also announced plans to introduce measures, particularly in the hospitality industry, to ringfence outstanding rent built up where a business has been forced to close during the pandemic. Whilst the full detail, and further legislation, is awaited and due shortly, it is proposed that the ringfenced rent would be subject to an agreement to be reached between landlords and tenants as to how to share the financial burden between them, with a new prescribed legal procedure and binding arbitration process applicable if an agreement cannot be reached. It appears the ringfencing and private arbitration procedure may only apply to arrears accrued by relevant tenants during the pandemic period. However the Government has urged tenants to start repaying rent as soon as the restrictions are lifted and tenants are able to reopen.
How much pressure has built up in the landlord and tenant cooker?
Quite a bit, we believe. Landlords have been emboldened by the recent decisions in Commerz V TFS Stores Limited  and Bank of New York Mellon (International) Ltd V Cine-UK Ltd . In the TFS Stores (The Fragrance Shop) case – covered in our recent blog - the retail tenant occupier defended the landlord’s claim for rent on 3 grounds:
- the claim was premature
- there was a loophole in the Government’s restrictions which should not have been exploited; and
- the landlord should have insured against the pandemic and relied on that for its rental income.
All three defences failed. The Court found that the rent was payable forthwith as a debt. The court reached a similar decision in the follow up Cine-UK case.
What is the market's view on rent arrears?
The British Property Federation (BPF) called recently for an end to the moratorium on commercial property eviction. The BPF reported that out of 16,320 UK retail, hospitality and leisure property leases, 50% of the rent falling due since March 2020 has been paid. Agreements, including payment plans, waivers, rent holidays and deferrals, have been reached in relation to 27% of the rent due. The remaining 23% of rent that has fallen due since March 2020 which is unresolved will be the focus and where the pressure now is. With more positive economic growth and indicators right now, many landlords will be emboldened by the recent court judgments and increasingly resolute where there are unresolved rent arrears – although the extension of the restrictions on enforcement and the potential for compulsory arbitration are of course designed to hold back landlords for some time to come.
Payment plans – what have the parties actually agreed?
As reported by the BPF, payment plans have been widespread and commonplace. In many cases, however, these have been poorly documented, sometimes with unfortunate and unforeseen consequences.
Tenants may find that rather than a permanent rental waiver or concession, in fact all that has been agreed is a deferral of the liability with interest accruing and still due in addition to the rent. Where the agreement has been badly drafted and the terms of the lease have, in effect, been varied, landlords may find that inadvertently tenant guarantors have been released.
A well and properly drafted agreement will be:
- signed by the correct and fully authorised parties.
- clear in its terms, with no scope for interpretation issues or misunderstandings.
- typically in the form of a side letter, and personal to the parties, and would no longer apply in the event of an assignment (or underletting),
- confidential to the parties,
- disregarded on rent review, and
- terminable forthwith in the event of breach.
As we work through and out of the pandemic, and with increased pressure on tenants where there are unresolved arrears, the advice is that renewed efforts to reach an understanding and agreement are now timely if not vital - nevermore so given the latest announcement on a binding arbitration process where agreements cannot be amicably reached.