A brave new world for commercial landlords and tenants as COVID-19 related restrictions on debt recovery end

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The last of the restrictions imposed on commercial landlords during the pandemic to protect tenants from aggressive debt recovery action will be lifted at the end of March 2022.

As a result, the ban on forfeiture for non-payment of rent and restrictions on the use of winding-up petitions and statutory demands, introduced by the Coronavirus Act 2020 and the Corporate Insolvency and Governance Act 2020 (CIGA) respectively, will cease to apply. These measures were primarily introduced to assist businesses forced to close temporarily due to the enforced lockdowns.

So, as restrictions are lifted, where does this leave landlords and what steps will they now be able to take regarding the recovery of rent arrears?

Forfeiture

The suspension of forfeiture was lifted on 25 March 2022. This means that landlords can once again respond to the non-payment of rent by repossessing premises without notice or recourse to the Courts. However, tenants can apply to the Courts for relief if they can pay the arrears and their landlord’s costs.

Commercial Rent Arrears Recovery (CRAR)

During the pandemic, the minimum threshold for net unpaid rent due in order to trigger CRAR was raised. This change has been reversed effective as of 25 March 2022. CRAR permits landlords to instruct an enforcement agent to seize a tenant’s goods and sell them to cover the rent arrears owing.

Winding-up Petitions and Statutory Demands

Since October 2021, it has been possible to seek a winding-up petition against a debtor tenant but only if the debt was not accrued as a consequence of financial difficulties brought about by the pandemic. This restriction will end from 31 March 2022.

Prior to the pandemic, a statutory demand could be used to issue a winding-up petition. However, in March 2020, a blanket ban was placed on this practice. The ban was then lifted in October 2021 but with little impact due to the continuing restriction on the use of winding-up petitions. Therefore, statutory demands will become effective again on 31 March when the last restrictions on winding-up petitions are removed.

Other debt proceedings were allowed to continue as normal during the last two years and, with the restrictions imposed on winding-up petitions and statutory demands, these have been used more widely by landlords despite it being a more expensive option.

Corporate Insolvency and Governance Act 2020 (CIGA)

The remaining temporary insolvency measures contained in CIGA 2020 also expire on 31 March 2022. These included the restrictions in Schedule 10 to CIGA 2020 on issuing winding-up petitions, but it will no longer be necessary to serve a Schedule 10 notice on a debtor 21 days before issuing a winding-up petition (or to obtain court dispensation). Also being dropped is the minimum petition amount of £10,000, and petitions can revert to being based on a statutory demand relating to a debt of at least £750.

Commercial Rent (Coronavirus) Act 2022

In anticipation of a return to the previous debt recovery regimes, there was much concern raised about a potential deluge of actions being brought by landlords. In response, an arbitration scheme will be created under the Commercial Rent (Coronavirus) Act 2022 (CRCA 2022) to help stem the flow.

The scheme will be made available to tenants with rent arrears relating to the period from 21 March 2020 until the date the specific COVID-19 restrictions affecting their business ended. Such arrears are referred to as protected rent debt which must be dealt with under the arbitration scheme and other enforcement options are restricted while the window for referrals under CRCA 2022 is open.

Despite the creation of the scheme, it is projected that a relatively small cohort of tenants will meet its eligibility criteria with an even smaller number of disputes being dealt with by it. The scheme will operate for a six-month period, closing on 24 September 2022.

The CRCA 2022 is likely to influence the decisions of landlords in relation to the recovery of protected rent debt.

A tenant may not include any arbitration award it receives in a company voluntary arrangement, scheme of arrangement or restructuring plan in the 12 months following it. In turn, this may lead landlords to make arbitration referrals if they believe their tenants may seek to pursue any of these options. As the arbitration only deals with ring fenced rent arrears, this would not prevent a tenant from using a process to reduce future rent so using arbitration as a defence may have limited success.

Significantly, the question of how an arbitration involving a tenant or landlord who is the subject of multiple, separate referrals will be dealt with currently remains unanswered. Parties will be at liberty to choose their arbitrator but there are no specific requirements laid out that address these potential scenarios.

The arbitration scheme is designed to balance the desire to preserve the tenant’s viable business, but not at the expense of the solvency of the landlord. Where a tenant can afford to pay the protected rent, they should do so without delay. Where the tenant cannot afford to pay it in full, the arbitrator will consider issues of affordability, taking into account what the tenant can afford to pay which ensuring that the landlord’s solvency is preserved. Any rent concession awarded by the arbitrator should be affordable to both the tenant and the landlord.

We are able to provide advice and assistance to landlords and tenants looking to negotiate regarding the payment of protected rent and navigating the arbitration system itself. For more information, please get in touch.

We will be discussing this in more detail at our upcoming webinar on 4 May 2022.