Under the Commercial Rents (Coronavirus) Act 2022 (the Act), a rent arbitration scheme has been introduced with a temporary moratorium in place until 23 September 2022.
The government has produced a ‘commercial rent code of practice’ (the Code) which provides practical guidance in respect of:
- Things to consider when negotiating an agreement over rent arrears;
- Eligibility criteria under the Act;
- How the rent arbitration scheme works; and
- When the protected period started and ended for different businesses.
The guidance encourages parties to settle rent arrears disputes and make allowances where possible. If a party refuses to negotiate or an agreement is cannot be reached, either party can make a referral under the rent arbitration scheme.
The Act does not affect arrangements already made between landlords and tenants – the terms of these agreements should be adhered to.
Impact on landlords
- Financial impact
On referral to the scheme, an arbitrator will consider not only whether the tenant’s business is viable, but also have regard to the landlord’s solvency. Where the tenant can afford to make full repayment, it will be ordered to do so.
For commercial landlords, this is particularly important as non-payment of rent is likely to have had a knock on effect on their ability to pay their own debts, particularly with rising interest rates.
Landlords who have been unable to make their own loan repayments, should contact their lenders to negotiate further repayment terms. Following the pandemic, many lenders have offered deferrals, repayment holidays and renegotiated loan terms which landlords should make full use of.
- Risks of arbitration referral
Both parties will be required to provide detailed financial information – providing the right information will be crucial and will take time to collate. Advice from professionals will involve additional time and costs.
The parties will not have any visibility on the arbitrator’s expertise or understanding of complex financial information across different business sectors.
- Rent deposits
Deduction from rent deposits and rent deposit top ups - Prior to the Act coming into force there were no restrictions on landlords deducting rent arrears (whether protected or not) from rent deposits. However, as a result of the Act, during the moratorium period or whilst an arbitration is in progress, landlords now cannot utilise any part of the tenant’s deposit towards protected rent arrears. Additionally, during this period tenants are not obliged to provide any further contribution to rent deposits (for example to top up the deposit, if the landlord had deducted rent arrears before the Act came into force).Risk of reversal of any deductions - If a landlord deducted rent arrears from rent deposits prior to the Act coming into force, those deductions will be treated as protected rent debts under the Act – this means the arbitrator will consider these payments as part of the overall rent debt. Where landlords have deducted these sums without any express agreement or arrangement with the tenant, there is a risk that the arbitrator may make a decision to reverse these deductions.
Comment
The Act means that landlords and tenants now have access to a binding decision process to resolve outstanding commercial rent arrears and move forward. However, the time and costs which may be spent utilising the rent arbitration scheme and the uncertainty about the outcome means that the most favourable option remains for landlords and tenants to negotiate directly.
Looking to the future, as the current rental market has seen changes in the demand for premises and rents, landlords should obtain advice from a local marketing agent on whether their premises are being rented at the appropriate level and the demand for the premises in the area. Landlords may wish to consider the following, as part of direct negotiations or after the moratorium period has expired:
- Repurposing premises, for example converting commercial premises to residential or mixed use premises, or offering “pay as you use” serviced offices in keeping with the current trend of people predominantly working from home
- Whether a lease surrender can be negotiated to minimise losses and/or potentially to get more viable tenants in the premises
- Being flexible in the type of leases being offered and consider alternative options such as turnover based leases
For further information on this article, please contact Nazash Asif or another member of our Restructuring & Insolvency team.
