Tackling Covid-19 Commercial Rent Arrears – is the Government hoping that landlords and tenants will just work it out themselves?
Legal Development 06 October 2021 06 October 2021
UK & Europe
UK Real Estate Insights
The Government has announced several measures to withdraw or replace the Covid-19 moratorium and CRAR restrictions, including restrictions on winding up petitions.
The Government’s proposed measures to withdraw or replace the Covid-19 moratorium and CRAR restrictions whilst preserving tenant businesses, following the responses to the Call for Evidence are easily summarised, but may well prove more challenging to implement. In short, the Government proposes to:
- “Ringfence” rent debt accrued during the pandemic by businesses affected by enforced closures; and
- Establish and enforce a system of binding arbitration to be undertaken between landlords and tenants to deal with “unresolved” arrears disputes.
In addition, restrictions on winding up petitions have been extended in part so that, in reality, winding up petitions will not be available where the debt relates to Covid arrears.
Is this simply a “tenant friendly” approach?
The key points to note from the responses to the Call for Evidence were:
- Collectively, tenants and landlords represented over 86% of all respondents. Though there were significantly more tenants (306) than landlords (133).
- “A significant group of tenants” stated they had commonly experienced landlords refusing to negotiate on rent arrears disputes.
- Alternatively, a subgroup of landlords suggested they had pursued what was commonly referred to as ‘asset management deals’ – this is where some form of rent forgiveness (reduced, deferred or waived) was agreed in return for a commercial benefit to the landlords (e.g. removal of break clause or extension of lease).
- There was no clear consensus on whether the current moratorium provides sufficient time for negotiations. 84.4% of tenants suggested that it does not provide sufficient time. Conversely, the majority of those suggesting it was sufficient time were landlords.
- Further, the majority (61%) of respondents either disagreed or strongly disagreed that the Government's “Code of Practice” on rent arrears was not effective. The predominant opinion expressed to explain this was that the voluntary nature of the current code of practice means that it is easily ignored and therefore limits its effectiveness.
The Government provided 6 potential options to prompt discussions on how best to move forward. The most preferred option for landlords was to allow the measures to expire on 30 June 2021 (89.5%). On the other hand, binding non-judicial adjudication between landlords and tenants was the most preferred by tenants (66.3%).
The Government said that they recognised the clear dichotomy between landlords and tenants but has nonetheless favoured the attitude of commercial tenants despite a significant number of landlords voting in favour of allowing the measures to expire in June.
Despite the Government’s aim to provide a long-term solution to the resolution of Covid rent arrears, there is still little clarity. We do not know who the new rent arrears arbitrators will be, we do not know how they will be appointed, we do not know what rules they will follow or how their rulings will be enforced or, indeed, appealed.
The Government has said that the ringfencing will only apply to affected commercial tenants who have accrued rent arrears from March 2020, until enforcement restrictions for their sector are removed. The moratorium will not apply to tenants who failed to pay rent after the end of restrictions for their sector and who have not been affected by enforced closures during that period.
It is not yet clear how “restrictions” will be interpreted. It is highly likely that vulnerable sectors such as hospitality and non-essential retail will benefit from the longest periods of ring-fencing.
This implies that it will be some time, likely many months, possibly years, before landlords faced with persistent debt will be able to take advantage of any meaningful remedy to recover Covid arrears. It is, of course, impossible to know whether this is deliberate but the Government has been clear all along that it wants landlords and tenants to reach consensual arrangements – and perhaps, by requiring landlords to pursue an as yet unspecified arbitration procedure, it hopes to encourage more agreements where landlords are faced with otherwise intolerable delays.