The government has unveiled its long-awaited plans for arbitration to handle pandemic-related commercial rent arrears, along with a code of conduct that effectively sets the standard for the draft legislation expected to follow through next year.
To protect businesses forced to close during the pandemic, the government imposed a moratorium on commercial landlords evicting tenants who were unable to pay their rent. Restrictions stopped landlords seizing goods in lieu of rent, whilst businesses in rent arrears were protected from insolvency proceedings by their landlord.
The new code of conduct came into effect on 9 November 2021 and applies across the UK to all commercial leases held by businesses with rent arrears caused by the impact of the pandemic within a ring-fenced period.
This is all intended to support the wider economy by encouraging landlords to consider the longer-term benefits. The key takeaway is that landlords are urged to reach a negotiated settlement, rather than issue proceedings, if that will help protect the viability of the tenant’s business.
However, this isn’t a blank cheque for tenants who want to withhold rent on commercial premises – if they are able to pay, they are expected to do so. Also, it relates to specific ring-fenced periods and sectors. Businesses that were able to continue trading, such as pharmacies, will not be covered by the proposed legislation, although each situation will be judged on a business-by-business basis as not all tenants will fit neatly into the sector-related time restrictions outlined in the code.
Arbitration will apply only to arrears which relate to periods of mandated closure. This means that where there has been any gap in payment, it is important that landlord and tenant are clear about the period to which any subsequent rental payment relates. If a date within the ring-fenced period is not specified for any such payment, then it will be treated as outside the scope of the arbitration process. However, the government is encouraging landlords to use of the code when resolving all rent arrears, regardless of whether they fall inside the scope for arbitration, rather than by issuing proceedings.
And because the aim is to avoid landlords pursuing tenants through the Courts, the draft legislation provides several roadblocks on debt claims and petitions for bankruptcy. These include arbitration of any County or High Court judgments issued from 10 November 2021 until the Bill comes into force, so judgments made in that time for ringfenced debt could subsequently be cancelled by an arbitration award. The draft also prevents landlords from petitioning for bankruptcy of a business tenant in relation to any ring-fenced debt in the same period.
The Commercial Rent (Coronavirus) Bill will formalise the code of conduct by setting out a binding arbitration process for rent arrears accrued during the pandemic where tenants are unable to reach a negotiated agreement with the landlord. To allow time for the legislation to be introduced, protection from eviction for commercial rent arrears will remain in place until 25 March 2022.
