Property litigation weekly update – 12 November 2021
In this week's bulletin the team discuss the long awaited Government announcement in relation to Covid-19 Commercial Rent Arrears, along with some positive news stories and insights from across the firm.
Covid-19 Commercial Rent Arrears: long awaited government announcement
For some time now, landlords and tenants alike have been waiting to hear the government's plans to deal with the deluge of unpaid commercial rent arrears accrued during the pandemic.
For over 18 months we have been in a hiatus. On the one hand, the moratorium on forfeiture for non-payment of rent remains in place until March 2022 and there have also been restrictions on the use of winding-up / bankruptcy petitions as well as the Commercial Rent Arrears Recovery (CRAR) procedure which has meant landlords' options have been more limited. On the other hand, several high-profile cases have been decided in favour of landlords, requiring tenants to pay covid arrears in full.
Clarification of the way forward was, therefore, eagerly anticipated. This week the government has finally spoken.
A new Code of Practice (Code) has now been published which provides guidance to landlords and tenants on how they should approach and deal with rent arrears which have accrued since March 2020. In addition, the Commercial Rent (Coronavirus) Bill (Bill), which sets out the forthcoming arbitration process, was introduced into Parliament on 9 November 2021. It is anticipated the Bill will come into force in March 2022.
We have digested some of the key takeaways from the Code and the Bill:
Code of Practice
- The Code applies to the whole of the UK, however it is non-binding and provides guidance only. It is tied intrinsically to the arbitration process, but it cannot yet be said whether a failure to comply with the Code will be taken into account if the dispute goes to arbitration.
- There is an overarching principle that tenants who can pay their rents, should do so.
- Existing agreements made between landlords and tenants should be honoured and not re-opened.
- Landlords and tenants are encouraged to negotiate an agreement taking into account the behaviours, principles, affordability, and viability statements discussed in the Code. To show they cannot afford to pay covid arrears, a tenant will need to show that (whilst it has a viable business) it cannot meet the affordability test.
- A non-exhaustive list of evidence to show (or disprove) affordability is set out in Annex B of the Code, which will be a helpful starting point for landlords and tenants.
- The Code is clear that preserving the viability of the tenant should not be at the expense of the solvency of the landlord. There is no requirement to agree such concessions as would cause a landlord to be unable to pay its own debts as they fall due.
- Parties are encouraged to seek legal advice where necessary.
Commercial Rent (Coronavirus) Bill
- Where an agreement cannot be reached and the tenant has 'protected arrears', either party can refer the dispute to arbitration.
- Protected arrears are those which have accrued during the period for which a business was forced to close as a result of the various government regulations (which are defined specifically in the Bill) made since March 2020.
- Arrears includes rent, service charge, insurance and interest on those sums.
- The window to apply for arbitration will be 6 months from the date legislation comes into force.
- There will be a process for each party to make proposals for concessions or a payment plan, submitting evidence to substantiate the proposal.
- In considering the viability of the tenant, the affordability of any proposal and the solvency of the landlord, the Bill gives the arbitrator a wide discretion to take into account any factors and circumstances they consider appropriate. This can include considering group structures and dividends paid out - disregarding anything done with a view to improving the landlord's or the tenant's position at arbitration.
- The arbitrator has a discretion to reduce the amount of arrears which the tenant is liable to pay to the landlord, and also to allow the tenant up to 24 months in which to make payment.
- The arbitrator will also make an award on the costs of the arbitration, again, with a wide discretion to split costs between the landlord and the tenant as they see fit.
- In addition to introducing the arbitration process, the Bill also includes a ban on landlords taking action to recover the protected arrears, including by issuing claims, using CRAR or by forfeiture.
- Equally, once a dispute has been referred to arbitration, a tenant is precluded from entering into a CVA or other insolvency proceedings specified in the Bill.
What do we think?
Whilst the Bill is still subject to amendment by Parliament, and we will have to wait to see whether there is anything significantly different in the enacted legislation, the government's views have been made clear. From now on, landlords and tenants should be negotiating with the Code in mind.
The Code is not legally binding, but the risk of ending up at arbitration (where both the landlord's and the tenant's financial affairs, historical relationship and conduct during the pandemic will be subject to scrutiny in a public forum) may encourage parties to take negotiations seriously and come to an agreement sooner rather than later.
The moratorium on action in relation to covid arrears for a further period is a blow for landlords, however the confirmation that tenants should be paying rent outside of the protected period provides some relief.
Positive news stories
- A podcast offering sound postcards from beautiful places around the UK is proving a surprising hit
- The first 'Injustice Advent Calendar' has been launched, offering 24 simple ways to make the world a better place in partnership with a selection of world changing organisations
- US reopens border to UK travellers after almost two years
Insights from around the firm