The Government will legislate to ‘ringfence’ rent arrears accrued during COVID-19 by businesses which have been affected. It aims to establish an arbitration process which is binding on commercial landlords and tenants. However, such process is to be used only as a last resort and where the landlord and tenant cannot come to an agreement following negotiations. The revised Code of Practice set to be introduced will contain principles which landlords, tenants and the arbitrators must take into consideration during the negotiations and arbitration.
As we reported recently, Section 82 of the Coronavirus Act 2020 (“The Act”) will continue until 25 March 2022 in order to allow sufficient time for the new process of ‘ringfencing’ rent arrears accrued during COVID-19 to be put in place. This Act currently prevents landlords of commercial properties being able to evict tenants for non-payment of rent.
The legislation will ‘ringfence’ arrears in relation to periods of enforced closure from March 2020 until the point at which restrictions are lifted for the tenant’s particular business sector. The Government has advised that those tenants who have not been affected by COVID-19 and enforced closure, and who have means to pay their landlord, should pay. Landlords will be able to evict tenants for non-payment of rent for a period prior to March 2020 and after the end of restrictions for their sector and who have not been affected by business closures during this period.
A process of binding arbitration is to be introduced to resolve any outstanding disputes where an agreement cannot be reached between landlord and tenant. The new legislation encourages both parties to negotiate waivers or deferrals of the rent arrears to try to come up with a resolution.
The Government, before the new legislation comes into force, has extended until 25 March 2022 the current protections for commercial tenants in relation to eviction and the restriction on the use of the Commercial Rent Arrears Recovery. This restricts the seizure of goods owned by the tenant in lieu of rent owed unless the rent arrears are worth more than 554 days. The Government has also extended the restrictions in relation to serving a winding up petition based on a statutory demand until 30 September 2021. These extensions have been put in place to allow sufficient time for successful discussions and negotiations between tenants and landlords in relation to the rent arrears.
Voluntary Code of Practice
In June of last year, the Government published a Voluntary Code of Practice. The Code sets out a framework for landlords and tenants to work together in relation to rent deferrals and waivers, dependant on periods of business closure where the tenant’s ability to trade was affected. In April 2021, a Call for Evidence was launched, which asked landlords and tenants to provide feedback in relation to their negotiations on requests for concessions on rental payment. The feedback concluded that the Code was very useful. However, due to its voluntary nature, many landlords and tenants are no longer using the Code as they once did to structure negotiations.
Before the new legislation on ‘ringfencing’ and binding arbitration comes into place, the Government has advised that they will publish a revised Code of Practice which will set out what they expect parties to take into consideration during the negotiations and arbitration.
The new arbitration process
Where an agreement cannot be made between landlord and tenant in relation to a possible waiver or deferral of rent arrears, binding arbitration must be undertaken. There is an expectation that tenants should be allowed breathing space to agree new terms and that landlords should share the financial burden with tenants where they are able to do so.
The new legislation applies to all commercial rent debt accrued due to the pandemic closure restrictions in sectors which have been impacted. Once restrictions are lifted in a tenant’s sector, rental payments should commence. If the tenant is unable to pay in full, then landlord and tenant should negotiate using the principles set out in the revised Code of Practice.
In summary, once the new arbitration process is in place:
- Landlords will be able to evict tenants for non-payment of rent for periods before March 2020 and from the end of the ‘ringfenced’ period.
- It only applies to those tenants affected by the pandemic restrictions and by enforced closures.
- Interest will be charged, if the landlord wishes, on rent incurred from the end of the ‘ringfenced’ period onwards. Interest can only be charged if interest is included in a term of the lease.
As we await the new legislation, there have been some concerns regarding the grey areas in the guidance the Government has published:
- The Government has advised that where tenants can pay their rent arears, they should do so. However, this could lead to a large amount of financial disclosure to show why a tenant cannot afford to pay their rent arrears. This may be unattractive for some larger businesses to disclose such information to their landlords.
- There is very little guidance on the period of ‘ringfencing’. Some sectors have eased their restrictions gradually over time, and it is unclear at which point the ‘ringfencing’ period will begin and how the term ‘restrictions’ is to be interpreted.
- The Government have not yet confirmed what will happen to the existing proceedings which have been issued by landlords in relation to debt claims for rent arrears that are currently making their way through the Court system.
The Government aims to publish further details about the binding arbitration process and how it will work in due course. We will provide a further update as and when this information becomes available.
