A new way forward for Commercial Landlords post-pandemic

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The Covid-19 pandemic has had a significant impact on most commercial landlords, regardless of the size of their portfolios. Landlords have been unable, and remain unable, to forfeit leases, evict tenants or take steps to recover unpaid rent incurred as a result of the pandemic.

This absolute restriction, introduced under Section 82 Coronavirus Act 2020, has been extended until 25 March 2022 leaving some landlords with up to 2 whole years’ worth of unpaid, or partially unpaid, rent. Current statistics indicate that there may be in the region of £7.5 billion worth of rent arrears.

In addition, there remain prohibitions on the use of Commercial Rent Arrears Recovery (CRAR). Without 554 days’ unpaid rent, the Courts have additional requirements and expect landlords and tenants to negotiate before winding up and bankruptcy petitions are processed by the Court and Government.

Whilst these measures have protected commercial tenants during lockdowns, they have left landlords questioning where their assistance is and, indeed, whether taking the matter to the Court will be worth it in the long run (taking into account legal costs and court fees).

The Government did publish a Code of Practice in an attempt to help structure negotiations between landlord and tenants in Summer 2020 however this Code of Practice was voluntary and if one party didn’t engage, the time spent will have only served to increase costs.

However, following their paper titled “Supporting businesses with commercial rent debts” dated 4 August 2021, the Government have, in November 2021, published its proposals in respect of a new Code of Practice. Draft legislation known as the Commercial Rent (Coronavirus) Bill will try and assist landlords in recovering the rent due and owing to them as a result of the pandemic.

Despite this publication, it is likely that this assistance won’t start until 25 March 2022 one day after the March Quarter day and 2 whole years after the first lockdown.

The draft legislation and Code set out that:

a. The Government is to create a binding arbitration process for landlords and tenants to enter into where negotiations have failed.

b. The process applies to certain businesses which were forced to shut during the pandemic including hospitality and nightclubs, non-essential retail, garden centres, personal care, hotels and tourist accommodation, sport and leisure and theatres, cinemas and large entertainment venues. It does not apply to any other sectors including those businesses operating out of offices.

c. The process is only available for certain ringfenced debts – being the rent from the 21 March 2020 (the start of the first lockdown) until the tenant’s sector was able to re-open – and only to businesses that are unable to pay the debts due.

i. If a business’s debts fall within the process but the business can pay its debts in full, it is expected to do so.

ii. Landlords will be able to charge interest on rent incurred after the tenant’s sector re-opened if they are allowed to under the terms of the lease.

d. The Government expect landlords to “share the financial burden with the tenant where they are able to do so” and the legislation and Code exemplify this by granting the arbitrator wide discretion to write off “the whole or any part of the debt”, “giving time to pay” and/or “reducing interest otherwise payable”.

i. The Code states that the aim of the Government is to “do everything reasonable to enable otherwise viable businesses to continue operating”.

e. Any rent due from before the pandemic or post-re-opening of the tenant’s sector will not fall within the process and will be due and owing as required under the lease between the parties.

i. Once the arbitration system is in place, it is expected that landlords will be able to exercise their rights to evict tenants for any rent not paid from before the pandemic or post-re-opening but of course, the Government advises that landlords and tenants attempt to negotiate before terminating leases.

Practically, the Government expects tenants who can pay all of the rent that fell due during the pandemic to do so and expects tenants and landlords to have attempted to come to an agreement before entering into the process. However, the process, once in place, will only slightly lift the burden on landlords carrying major losses of rent.

If you are struggling to recover rent from your tenant or would like advice on your position, please do not hesitate to contact Charlotte McMurchie at [email protected] or Sarah Farish at [email protected].