Commercial Rent Arrears after the Expiry of the COVID-19 Pandemic Legal Protection – Update One

The UK Government took extraordinary measures to protect tenants at the outset of the COVID-19 pandemic, creating a legal “moratorium” which prevented landlords of commercial premises from evicting tenants for failure to pay rent (after the Coronavirus Act 2020 came into force on 25th March 2020).

Landlords were also restricted in their use of the Commercial Rent Arrears Recovery (CRAR) process, as well as from serving statutory demands and winding up petitions against both individuals and companies.

Government Publications until now

A voluntary Code of Practice was published by the Government on 19th June 2020, encouraging landlords and tenants to act “reasonably and responsibly” to ensure “transparency and collaboration”.

This Code will be reviewed by the time the protections offered to tenants expire on 25th March 2022, but the results of the Government’s initial consultation demonstrates that landlords are naturally engaging significantly less “in the spirit of the Code” than tenants – 52.9% of tenants believed that 0 – 20% of landlords were engaging, while landlords stated that 56.5% of tenants were engaging in the spirit of the Code.

We will explain why this is of particular relevance to the costs of a dispute below, but there is no doubt that this consultation contributed alongside the pure economic facts to the Government’s decision in June 2021 to extend the majority of the protections until 25th March 2022.

The document which is most relevant right now is the Policy Statement which the Government released on 4th August 2021, taking that consultation into account. The full Policy Statement can be read at this link.

The Statement outlines that the Government is taking another unprecedented step to institute a binding arbitration process, which will be used to settle any disputes over debts that could not be directly resolved by the landlord and tenant themselves.

Legislation will first have to be introduced which will “ringfence” commercial rent arrears which have accrued during the pandemic, keeping the COVID protective measures in force for that debt only. This means that landlords will only be able to immediately evict tenants who owe for rent due prior to March 2020, or after the end of any restrictions for their sector, as long as they have not been affected by business closures during that period.

Government Publications ahead

The Government has also advised that the Code of Practice will be strengthened in the meantime, and it is clear that there will be a significant push for disputes to be resolved by negotiation rather than having to resort to the arbitration process or worse in the Government’s view, court proceedings. In their own words, they extended the protections for commercial tenants until March 2022 as, “we believe that these measures will provide the breathing space needed for successful negotiation between tenants and landlords.”

What to do now

Tenants and landlords should both be conscious of the fact that other legal avenues may be available to seek repayment of any commercial rent arrears in the meantime. Furthermore, there is no guarantee of when Parliament will consider the ringfencing and arbitration process, as well as whether it will potentially favour either tenants or landlords in practice.

If you are on either side of a commercial rent debt, you should therefore obtain legal advice and begin the process of negotiating the debt as soon as possible. This will offer the chance of reaching a mutually acceptable settlement without needing to incur the likely substantial cost and take on the risk of the binding arbitration process. At the very least, it will allow you to demonstrate to the arbitrator that you have acted “reasonably and responsibility” in trying to resolve the dispute, which could lead to their decision that the other side should be liable for the entire cost of arbitration.

There is still a great deal of uncertainty as we wait for the Government to deliberate and create legislation setting out the precise nature of this procedure, but seeking legal advice in good time will mean you are apprised of any developments without delay and can take immediate advantage of any legal opportunities that become available to you.

Whether you are a landlord or tenant, if you require advice relating to commercial rent arrears, please speak to our specialists at Farleys on 0845 287 0939 or contact us by email. In the meantime, keep an eye on our blogs page, as we will keep you informed as and when the Government makes any progress with this arbitration system.