The Government has issued the following statement with regard to ring-fencing commercial rent arrears arising as a result of the impact of COVID-19:
‘The Government has announced that it intends to put in place through legislation a scheme to ring-fence outstanding rent arrears relating to periods when a business’s ability to trade has been impacted by government action, and to introduce a binding arbitration scheme, with the moratoriums lifted once this legislation is in place.’
More clarity is needed on how this will work in practice and the Government have said that in the next Parliamentary session they will legislate to ringfence rent debt accrued during the pandemic from March 2020 for commercial tenants who have been affected by enforced business closures until restrictions for their sector are removed.
This will mean a return to normal contractual arrangements under the terms of the lease for those tenants able to pay their rent arrears in full and not affected by closures, and for any debts accrued outside of the ringfenced period.
The plan is to set out a process of binding arbitration to be undertaken by landlords and tenants. This is intended to be used only as a last resort when negotiations have failed on such matters as rent deferral/ waiver/longer-term repayment plans.
The aim is for arbitration to be an “impartial and manageable process” and a faster and easier resolution than through the courts. The Government expects landlords and tenants to contribute to the cost of arbitration if both are found to have negotiated in good faith. However, if any party is found not to have negotiated in the spirit of the legislative principles, arbitrators may be empowered to grant the cost of arbitration as part of their decision.
Ahead of legislating on a system of binding arbitration, the Government will publish an outline set of principles that they expect the parties and arbitrators to adhere to in a revised Code of Practice which will be embodied in the new legislation. This will allow landlords and tenants time to negotiate on that basis.
Until the further legislation is passed, the forfeiture moratorium for non-payment of rent for business tenancies in England is scheduled to apply until 25 March 2022 to allow landlords and tenants additional time to negotiate and settle outstanding rent arrears and for the new arbitration process to be put in place.
The impact of this is that the Government expects businesses that are open and trading as normal to pay their full rent in accordance with the terms of their leases, unless otherwise agreed with their landlord, as periods of normal operation will not be covered by the further legislation.
Tenants should clearly state in writing to their landlord how payments they make are to be treated, specifying the period of time that the payment should be apportioned to, for the avoidance of doubt.
Who does this apply to?
The new legislation applies only to debt for tenants impacted by COVID-19 business closures. As soon as legislation is passed, the commercial tenant protection measures will only apply to ringfenced arrears. This includes rent debt accrued from March 2020 by commercial tenants affected by COVID-19 business closures until restrictions for their sector are removed. This means that landlords will be able to evict tenants for the non-payment of rent arrears incurred prior to March 2020 and from the end of the ringfenced period. As normal periods of operation will not be within the scope of the further protections and binding arbitration in the legislation, tenants are encouraged to meet their rent payments for these periods.
Landlords can charge interest on rent incurred from the end of the ringfenced period onwards, if such interest payments are included in the terms of their lease.
If a tenant breaches any other lease terms (ie. by causing damage to the property), which gives rise to a right to forfeit, the landlord is still able to take steps to evict the tenant.
Tenants will be bound by the decision of the arbitrator and will have to pay rent debts accrued during the ringfenced period in accordance with that decision.
Landlords still have the following range of enforcement measures either individually or in combination:
- drawing down on rent deposits and seeking top-ups;
- claiming against current guarantors;
- claiming against Authorised Guarantee Agreements or Guarantees of Authorised Guarantee Agreements for post-1996 leases;
- claiming against former tenants or former guarantors for pre-1996 leases;
- bringing debt proceedings at Court (subject to the relevant protocols); and
- issuing or progressing proceedings for possession, brought on the basis of breach of covenant other than that to pay rent.
If you have any further questions regarding this or require assistance, please contact us.
September 8th, 2021