Can commercial landlords and their tenants map out a post-pandemic plan?

  • Posted

As we have reported throughout the last twelve months, commercial landlords have been awaiting the return to pre-pandemic ‘normality’ as much as anyone. Following numerous extensions to the government’s measures protecting tenants from enforcement action, the restrictions impacting landlords’ ability to deal with non-paying tenants are set to be lifted on 30 June 2021.

In practice, this would mean an end to the moratorium on forfeiture and the lifting of the temporary ban on issuing winding-up petitions where the inability to pay debts is caused by COVID-19. In addition, it will mark an end to the temporary changes to the amount of rent arears owed before landlords can resort to Commercial Rent Arrears Recovery (CRAR).

However, the measures imposed during the last year are likely to be replaced by a ‘new normal’ landscape for enforcement, rather than simply a return to the pre-pandemic set-up.

To that end, the government is now consulting both landlords and tenants on possible ways forward, amid fears that a wholesale removal of the restrictions may trigger a wave of forfeitures and statutory demands swiftly followed by an explosion of insolvency or administration applications from commercial tenants. Part of the fact-finding process will be gathering evidence of how landlords and their tenants have coped during the last twelve months and the extent to which they have been able to reach temporary compromises and agreements.

The potential options being floated by the government as part of the consultation are as follows:

Allow the measures to expire on 30 June 2021

Returning to the pre-pandemic scenario would be the preferred option for landlords but could lead to financial hardship or worse for tenants and is, therefore, likely to be unpalatable to the government which will want to limit economic damage.

Allow the moratorium on forfeiture to expire on 30 June 2021 but continue the insolvency limitations and CRAR changes for an extended period

Under this arrangement, landlords could evict tenants for non-payment of rent under the terms of their lease but couldn’t exercise CRAR, serve winding-up petitions or statutory demands. Landlords with non-paying tenants would have to consider each lease individually in respect of its grounds for forfeiture, rather than adopt a blanket approach to the arrears by forcing the entire business into insolvency. Landlords won’t want to be liable for rates in empty buildings and so forfeiture is unlikely to be a suitable option unless they have a prospective new tenant waiting in the wings.

Adopt a temporary targeted approach based on the impact of COVID restrictions on businesses

This would leave the current measures in place for an extended grace period for those tenants in the most difficulty and who have been most affected. This leaves open the question of which businesses would be considered eligible to take advantage of the continued moratorium. That said, indications are that a semi-sectorial approach would be adopted, to take into consideration factors such as enforced closure during lockdowns (e.g. hospitality/retail).

Promote formal mediation between landlords and tenants

The extent to which landlords and tenants will be required to pursue mediation to resolve disputes rather than it being an option remains unclear. This proposal has emerged as the existing code of practice has not proved very effective in bringing parties in dispute together on a voluntary basis. But would mandated mediation achieve the desired outcome?

Non-binding adjudication between landlords and tenants

Another possible option could be to make non-binding adjudication a pre-condition of parties in particular sectors taking their dispute to Court. Tenants may favour this approach more than landlords but if the adjudicator’s assessment of what a reasonable settlement would be is less than landlords are willing to agree, then landlords could still pursue their preferred course of action to recover arrears. In that respect, non-binding adjudication may simply serve to delay resolution and add to the costs involved for both parties.

Binding non-judicial adjudication between landlords and tenants

Alternatively, binding adjudication has been floated by the government in respect of debts accrued under leases where no rent agreement has been made. Under this proposal, adjudicators could bind the parties to rent reductions or deferrals over a given period based on evidence proposed by both parties.

Being required to justify why a tenant should pay the full contractual rent may prove unpalatable to landlords, particularly as they may not have a full picture of the tenant’s financial position in order to present the best case. Further, giving adjudicators the power to effectively re-write lease obligations is also very likely to meet with opposition from landlords.

Going forward

The government will continue to take evidence from both landlords and tenants until 4 May 2021, after which we are expecting to learn the conclusions drawn from the exercise and gain a clearer picture of what will happen after the 30 June cut-off. Landlords and tenants alike will hope to gain some certainty following this challenging period. Having delayed making any real decisions on how to get out of this moratorium, but rather having just kicked the can down the road, what happens now will very much define whether the moratorium was a success or just delayed repossessions. Should the latter prove to be the case, one would have to question whether it served any point other than to increase debt owed by tenants to landlords, and landlords to their funders.

Separately, the government has also pledged to rebalance the relationship between landlords and tenants by reviewing existing commercial landlord and tenant legislation, including the Landlord and Tenant Act 1954, and rent structures in light of COVID-19.