The Government's proposals in relation to Covid-19 arrears
Throughout 2020 and 2021 many businesses were forced to close their premises as a result of public health restrictions and faced significant disruption to their trading abilities. In response, the Government legislated to prevent landlords of commercial properties from evicting tenants for not paying rent; to restrict landlords’ abilities to recover rental arrears through the seizure of tenants’ goods; and to restrict the service of statutory demands and winding up petitions.
In April 2021 the Government launched a call for evidence to ask for views from the real estate sector on how best to withdraw or replace these measures while preserving tenant businesses.
As we reported last month, in June 2021 the Government announced that the existing moratorium on landlords exercising forfeiture for non-payment of rents would be extended to March 2022. At the same time, they announced an extension to the end of September 2021 of the current restriction against the use of statutory demands and against petitioning to wind up tenants in respect of arrears of rent, unless those arrears were not as a result of the Covid-19 pandemic.
The call for evidence was designed to help the Government understand how landlords and tenants have been responding to the build-up of rent arrears that has occurred as a result of businesses being unable to trade normally during the pandemic.
They wanted to achieve a better understanding of the risk to economic recovery posed by the remaining rent debts, and to see how landlords and tenants had already agreed to adjust existing lease terms to reflect the period of recovery that many tenant businesses will need once the trading restrictions are lifted.
The consultation asked respondees to respond to 6 possible options for how best to withdraw the tenant protections:
- Option 1 – allowing the current tenant protection measures to expire;
- Option 2 – allowing the moratorium on commercial lease forfeiture to lapse but retain the insolvency measures and restrictions on the use of CRAR;
- Option 3 – targeting existing measures to businesses based on the impact that Covid restrictions have had on their businesses;
- Option 4 – encouraging increased formal mediation between landlords and tenants;
- Option 5 – non-binding arbitration; or
- Option 6 – binding arbitration.
On 4 August 2021, the Government published its analysis of the responses it had received.
In conclusion, the two most favoured options were to allow the tenant protection measures to lapse on 30 June 2021 (89.5% of responding landlords were in favour of this option) and to introduce a scheme of binding arbitration to resolve rent debt (66.3% of responding tenants were in favour of this measure).
On 4 August the Government released a policy paper on how it plans to support businesses with commercial rent debts. The key points to note are as follows:
- The Government will legislate in the current Parliamentary session to ringfence arrears accrued during the pandemic by businesses affected by enforced closures.
- The legislation will include a process of binding arbitration to be undertaken between landlords and tenants. This would be a last resort, after the parties have been through a negotiation process but cannot reach a compromise. The arbitrations would be carried out by approved private arbitrators, who will act in accordance with legislative guidelines.
- Before the legislation is introduced, the Government will publish a revised voluntary Code of Practice, to allow landlords and tenants time to negotiate on that basis.
- In the meantime, the Government has stated that those tenants who can pay their regular ongoing rent and their rent arrears should do so.
The policy paper states that the Government expects that landlords should share the financial burden of the Covid response with tenants where they are able to do so, and should give tenants breathing space to agree new terms. They have also stated that tenants who can pay, should pay.
This suggests that there will need to be a high degree of co-operation and information-sharing between the parties, in order for the parties to agree what rent is outstanding and to agree what the tenant can afford to pay. The extent of arrears to be ring-fenced will vary according to the tenant's sector and will be based on the extent of restrictions suffered by that sector. Landlords of leisure and hospitality tenants will therefore be more affected than those of office or supermarket tenants.
The proposals suggest that landlords will waive some of the total amount of arrears outstanding, and/or agree a long-term repayment plan.
Landlords who want their tenants to stay in occupation will no doubt continue to work hard to achieve a negotiated settlement that works for both parties.
For other landlords, the prospect of an imposed compromise that allows their tenants to stay in possession is very unattractive. Landlords remain able to issue claims to recover all arrears due but this conflicts with the Government's policy and tenants may seek to stay rent arrears claims pending implementation of the arbitration scheme. Because of this, landlords may be better trying to achieve settlement as soon as possible.
Landlords should, however, remember that the ringfencing only applies to rent arrears in relation to the period of Covid restrictions. All a landlord's usual remedies remain available for recovering arrears that accrue after March 2022. Landlords can presently pursue tenants for non-financial breaches such as breaches relating to the state and condition of the property. Another possible approach, which becomes available to landlords from October, is to threaten to wind-up the tenant company if it cannot pay its rent arrears. Tenants may seek to have such petitions stayed if they rely on unpaid rent during a lockdown or in another restricted period, but not for arrears that pre-date or post-date those periods.
Tenants who trade in sectors which were the most affected by Covid-related restrictions, such as hospitality and leisure, will be able to benefit from these proposals to a greater extent than those in sectors which fared comparatively well, such as offices and essential retail.
However, it should be borne in mind that the Government expects that tenants will return to paying rent as usual from the date when the Covid restrictions were lifted in their sector.
If tenants were minded to start paying any of their arrears then it would make sense for them to do so first for periods of time when they were not under any Covid restrictions.
When negotiating with landlords and, if no settlement is agreed, probably also when presenting a case to an arbitrator, tenants will need to be able to show that they cannot afford to pay their rent arrears at once without suffering significant detriment, and to propose a reasonable resolution. They will also need to establish that the reason for this inability to pay is the impact of the Covid restrictions, not some other cause.
Landlords and tenants are likely to be divided in their responses to this announcement, although probably not surprised as it has been mooted as a possibility since the start of the summer. Many of the details remain unclear so we will issue further updates when more information emerges.