Legal briefing | |

Update on Covid-19 restrictions for commercial landlords and tenants – March 2022

Overview

As we have previously reported, many commercial landlords and tenants have had discussions about the extent to which they can comply with their leasehold obligations during the Covid-19 pandemic. The UK Government put in place a number of protective measures for tenants over the course of the past two years. Many of these are due to be lifted or modified by the end of March 2022.

In our note we summarise the changes that are set to take place and what this is likely to mean for tenants and landlords.

The Commercial Rent (Coronavirus) Bill

We have previously reported on the Bill here but, in summary, once the Bill becomes law, it will:

  • temporarily prevent certain remedies and measures from being exercised in relation to lockdown arrears that accrued during periods of enforced closure due to UK Government Covid-19 regulations (a "Protected Period"); and
  • introduce a system of binding arbitration for the resolution of lockdown arrears accrued during Protected Periods by tenants who i) occupied premises under business leases and ii) were mandated by government regulations to close their premises or cease trading, either in whole or part, and iii) to date have been unable to reach agreement with landlords ("Protected Period Arrears").

The parameters of a Protected Period will depend on where the property in question is located and the business in which the tenant was involved. In England, a Protected Period covers the period that the property was forced to close due to UK government regulations in relation to Covid-19, from 21 March 2020 onwards, with a longstop date of 18 July 2021. In Wales, the longstop date is 7 August 2021. The UK government Code of Practice contains a summary at Annex A of what the Protected Period would be for different industries across the UK.

Arbitration Scheme

The Bill introduces a binding arbitration scheme in respect of lockdown arrears that accrued during a Protected Period, where the parties have been unable to reach agreement. The updated UK government Code of Practice sets out details of the proposed arbitration scheme, which is intended to come into effect in late March 2022 after the Bill becomes law.

Forfeiture

Under the present statutory framework, commercial landlords are prohibited from forfeiting leases for non-payment of rent. Landlords may still forfeit in respect of other breaches, provided the necessary contractual and statutory procedures are followed.

The prohibition is set to be lifted from 25 March 2022 so that landlords can forfeit leases if tenants fail to pay their rent. There is, however, an exception in relation to rental arrears that have accrued during a Protected Period. Pursuant to the Bill, commercial landlords may not forfeit by reason of such arrears until after these have been determined by an award under the arbitration scheme.

Statutory Demands, Winding-Up and Bankruptcy Petitions

Since 1 October 2021, landlords have been prevented from initiating winding-up or bankruptcy petitions against tenants based on statutory demands for unpaid rent or other sums due under a commercial lease. This applies where the rent arrears were unpaid due to a financial effect of Covid-19. These restrictions are due to end on 31 March 2022, in respect of rent arrears accruing outside of a Protected Period. The Bill introduces an exception for rent arrears accrued within a Protected Period. It provides that winding-up and bankruptcy petitions can only be presented on the basis of an unchallenged statutory demand if this is served after a determination of the arrears pursuant to the arbitration scheme. Since a landlord does not need to serve a statutory demand before presenting a winding up petition based on rent arrears against a corporate tenant, this does not prevent a landlord petitioning to wind up a tenant for arrears in some circumstances.

Commercial Rent Arrears Recovery ("CRAR")

Over the past few years, several regulations were introduced to restrict the use of CRAR. These increased the minimum amount of net unpaid rent that must be outstanding before CRAR may take place.

CRAR cannot be used unless the tenant has rent arrears of at least:

  • 189 days’ rent on or after 24 June 2020 (but before 29 September 2020);
  • 276 days’ rent on or after 29 September 2020 (but before 25 December 2020); or
  • 366 days’ rent on or after 25 December 2020 (but before 25 March 2021); or
  • 457 days’ rent on or after 25 March 2021 (but before 24 June 2021);
  • 554 days’ rent on or after 24 June 2021.

These restrictions are due to end on 25 March 2022. From then, enforcement action can be taken against a tenant's goods for non-payment of rental arrears accruing outside of a Protected Period. The Bill introduces an exception for rent arrears accrued within a Protected Period and provides that CRAR can only be exercised after such arrears have been determined by an award under the arbitration scheme.

As before, CRAR would only be available for landlords to recover arrears of principal rent, rather than all other sums typically reserved as rent such as service charge and insurance.

Debt claims

The Bill also significantly restricts the ability of landlords to pursue Protected Period Arrears through debt claims. While there is no restriction on landlords issuing debt claims at court, the Bill requires the court to stay any debt claims issued on or after 10 November 2021 upon application of either party where the claims relate to or include Protected Period Arrears.

There is a separate provision that prevents enforcement against guarantors and tenants of any debt claim judgment obtained prior to 10 November 2021 and which relates to Protected Period Arrears. This effectively puts in place a temporary stay of enforcement of court judgments for debts relating to arrears for the protected period. This prohibition will apply until the arrears liability has been determined by an award under the arbitration scheme.

What will happen next?

Although intended to be enacted by the end of March 2022, the Bill has not yet been finalised so may be subject to further revisions and changes. The Bill will reduce the protections from which tenants have benefited during the Covid pandemic and may encourage landlords to take action against tenants.

The arbitration scheme and the restrictions on enforcement in the Bill do not apply to periods of rent arrears falling outside of a Protected Period i.e. after the relevant longstop date in July or August 2021, and so may not assist tenant businesses that are still recovering from the after-effects of Covid-19. A commercial tenant that fails to pay rent that is due outside of a Protected Period will therefore be exposed to the usual methods of landlord enforcement.

Despite the guidance provided and the current provisions of the Bill, it is unclear how the arbitration scheme will work in practice. At the moment, the Bill provides for an initial 6 month window from March 2022 during which parties can make a referral to the arbitration scheme. However, given the volume of unresolved rent arrears that relate to Protected Periods, it is quite possible that this referral window will have to be extended (and indeed the Bill provides for this eventuality).

There is also little indication on how long the arbitration process could  take, once put in place. The Code of Practice and the Bill provide some tentative timescales, but given that the scheme provides for the parties to negotiate and circulate proposals, as part of the process, before making formal proposals and representations to the arbitrator on the basis of financial viability, it is quite conceivable the process may take months from start to finish. This may be the case where arbitrators request further evidence from either party to properly consider what the parties have submitted before making an award.

Co-written with Flora Raine.

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