A Way Through Rent Arrears
The advent of Covid has meant all sorts of unforeseen circumstances for businesses. Here Litigation Executive Hayley Carr looks at what happens when rent arrears are one of the headaches to deal with.
As with most sectors in the current uncertain economic climate, commercial real estate has faced considerable challenges. According to the British Property Federation, as of 30 June 2021, it is estimated that £7.5 billion of commercial rent was in arrears. The Government recognised the challenges facing the industry and through the implementation of the Coronavirus Act 2020, a new Code of Practice and the Commercial Rent (Coronavirus) Bill, aims to provide support to those within the sector by striking a balance between the parties based on their financial circumstances. The hope is that landlords and tenants work together to protect viable businesses.
Commercial landlords and tenants have struggled to avoid incurring financial difficulties as a result of the pandemic. Consequentially, some tenants have failed to meet repayments, with landlords unable to enforce arrears. Previously utilised statutory procedures which allow landlords to recover rent arrears such as forfeiture, winding up or through enforcement agents such as CRAR, (Commercial Rent Arrears Recovery) have been restricted.
Without the protection afforded to commercial tenants through the enactment of the Coronavirus Act 2020, many businesses that had their usual operations restricted due to COVID related regulations, might have suffered irreparable damage.
The new Commercial Rents Code of Practice
The new Code of Practice provides guidance on how parties should negotiate rent arrears. The Code encourages landlords and tenants to work together to share the burden caused by the pandemic. It is hoped that landlords and tenants will be able to negotiate and agree over authority liabilities. If a tenant is unable to meet repayments, the new Code suggests that tenants should negotiate with their landlords in good faith, using the principles set out in the Code in the expectation that landlords waive some or all the rent arrears, where they are able to do so.
This should only happen where tenants have been genuinely affected by closures or other restrictions so that they are considered without means to pay, thereby offering some protection to landlords. Both parties should seek to agree mutually beneficial solutions. The implementation of these principles aims to provide balance to the sector in a fair and reasonable manner.
Whilst the new Code has been developed with leaders from hospitality, retail and property sectors, as it is voluntary in nature and non-binding, many landlords and tenants are not currently utilising it to structure negotiations.
The Commercial Rent (Coronavirus) Bill
The Government introduced the new draft Commercial Rent (Coronavirus) Bill on 9 November 2021. The Bill aims to prevent further debt actions and focus efforts on resolving rent arrear disputes between commercial landlords and tenants, in line with the Code and arbitration process. Either party can unilaterally commence the process, which will result in a binding agreement that landlords and tenants must adhere to. The intention is to assist the sector and those in it regain financial stability. This unprecedented dispute resolution mechanism should assist arbitrators in determining whether rent, which would otherwise be unquestionably due, should be discounted or deferred based on evidence put forward by both parties. Such evidence should allow the arbitrator to balance the tenant’s viability with the landlord’s insolvency with the aim of achieving amicable, reasonable and workable solutions.
The arbitration process is split into stages, affording one final opportunity to the parties to resolve their dispute without external interference. Either party can commence the process with a pre-application letter of notification containing a proposal for settlement. The other party can accept or counter the proposal. If this exchange does not achieve a workable agreement, the parties can apply for arbitration and will have the option to request a public hearing.
The Bill applies to all commercial leases held by businesses which have built up rent arrears, insurance and service charges as a result of COVID, regardless of the sector. Notably however, pharmacies are expressly excluded from the arbitration process. Whilst there is a different legal framework for agricultural tenancies, the agricultural sector may still wish to consider the new Code.
The new arbitration scheme is anticipated to come into force on 25 March 2022. The parties will have six months from the date of the Bill’s Royal Assent to refer the dispute to arbitration. If the parties fail to apply within the six-month period, the usual remedies to pursue arrears will become available to the landlord.
It is both a responsibility and duty of the parties to make proposals and engage in meaningful negotiations. Failure to do so may not be beneficial, as if both parties cannot reach an agreement, considering one another’s financial positions, the decision, if referred to arbitration would be taken out of their hands. However, in some instances this may be necessary if parties cannot come to a resolution on their own. The arbitration will follow the guidance set out in the Commercial Rent (Coronavirus) Bill (specifically the principles outlined in clause 16) to produce a final, binding resolution.
Parties attending arbitration should gather supporting evidence in accordance with the criteria outlined above to demonstrate how their business has been affected by the pandemic in advance of the arbitration. The parties share the arbitrator’s fees and are expected to pay their own legal expenses.
Considerations for the Tenant
With respect to tenants, the arbitrator must, so far as known, have regard to the assets and liabilities of the tenant, including any other tenancies to which the tenant is a party; the previous rental payments made under the business tenancy from the tenant to the landlord; the impact of the pandemic on the business of the tenant, and finally, any other information relating to the financial position of the tenant that the arbitrator considers appropriate.
Notably, this final aspect is open to wide interpretation and may produce inconsistent results dependent on what the relevant arbitrator considers appropriate. It may be a better approach to outline criteria that will be used by arbitrators to determine what “other information” may be considered. This in turn, will allow parties to adjust their expectations and arrive at the arbitration prepared.
Considerations for the Landlord
With respect to landlords, the arbitrator must similarly have regard to the assets and liabilities of the landlord, including other tenancies to which the landlord is party and any other information relating to the landlord’s financial position that the arbitrator considers appropriate. In making an assessment, the arbitrator must disregard the possibility of the tenant borrowing money or re-structing its business in order to make repayments.
This final aspect affords additional protection to the tenant, as it prevents landlords seeking to enforce arrears through unethical means.
It is unlikely that landlords will welcome the scheme in the same way tenants will, as it will limit a landlord’s ability to recover rent arrears. However, given that the scheme aims to provide support to commercial parties during this financially unclear and uncertain time, it should therefore only apply for that limited period, thereby alleviating some concerns from a landlord’s perspective. That is, provided the scheme is confined to that period, in order to meet those aims. There is, however, potential that if the scheme is an effective form of dispute resolution for the sector, the government may choose to keep it in place on a more permanent basis.
If your business has been affected by Covid-related restrictions and has left you unclear as to what your position is in respect of rent arrears, please contact us for advice.