Commercial landlords and recovery of rent – where are we now?
The various general restrictions on landlords' ability to take rent recovery action against commercial tenants, introduced to protect tenants at the start of the pandemic, have now come to an end.
From 26 March 2020, the Coronavirus Act 2020 imposed a general moratorium on forfeiture for non-payment of rent and subsequent regulations restricted the use of commercial rent arrears recovery (CRAR). Both of these restrictions came to an end on 25 March 2022.
From 26 June 2020, the Corporate Insolvency and Governance Act 2020 and subsequent regulations also limited the circumstances in which statutory demands could be used, winding-up petitions could be presented and winding-up orders made. The remaining restrictions came to end on 31 March 2022.
This guide summarises the process for the new Covid arrears arbitration scheme, the new moratorium that will be in place while the scheme applies and the other options open to landlords in relation to arrears not covered by the scheme.
Commercial Rent (Coronavirus) Act 2022 – the new arbitration scheme and new moratorium
The patchwork of original restrictions has been replaced by the Commercial Rent (Coronavirus) Act 2022 (the Act) which received Royal Assent on 24 March 2022 and is now law. The Act makes provision for relief from payment of certain "rent debts" under business tenancies (including tenancies which have been contracted out of the Landlord and Tenant Act 1954) adversely affected by coronavirus to be available through arbitration (if not resolved by agreement).
It was first introduced as a Bill on 9 November 2021 alongside the updated Code of Practice for Commercial Property Relationships following the Covid-19 pandemic which encouraged landlords and tenants to work together on resolving unpaid rent. The aim of the two was to set out a clear path for landlords and tenants to move from dispute to resolution together. The Act increases pressure on both parties to try and resolve any disputes before they are handed over to an independent party.
Protected rent debt: The Act introduces the concept of a "protected rent debt". Rent for these purposes includes rent, service charge, insurance costs, interest payments and VAT. It will be protected if (i) the tenancy was adversely affected by coronavirus, and (ii) the rent was due in respect a period starting on 21 March 2020 and ending on 18 July 2021 or, if earlier, the last day that the premises or part of them were the subject of a closure requirement or coronavirus restriction.
The period during which rent arrears are ringfenced by the Act will therefore vary from business to business (and the Act will not apply at all if the tenant's business was not forced to close).
The protected rent must be a debt. So rent that has already been paid in respect of the above period is not caught by the Act and the Act also does not cover rent that has already been dealt with by way of an existing settlement agreement.
The Act imposes a new moratorium on enforcement action in respect of any protected rent debt.
Arbitration: Part 2 of the Act makes provision for a landlord or tenant to refer resolution of relief from payment of a protected rent debt to a new statutory arbitration process where agreement cannot be reached.
"Relief from payment" in the Act specifically includes:
- writing off the whole of the debt,
- giving more time for payment (including payment in instalments); and
- reducing or writing off any interest otherwise payable by the tenant under the terms of the tenancy.
The window for either party to apply for arbitration is six months from and including 24 March 2022 (the day that the Act came into force).
The requirements and timescales for making a reference to arbitration are summarised below:
- The party that intends to refer to arbitration must notify the other party of its intention enclosing a formal proposal for settling the unpaid debt accompanied by supporting evidence.
- The other party may then put forward its own formal proposal in response, with supporting evidence within 14 days of the initial notification and proposal having been received. This period can be extended by agreement or by the arbitrator if he/she considers it a reasonable request.
- Each party may also put forward a revised formal proposal with further supporting evidence within 28 days of their own original formal proposal.
- A reference to arbitration can only be made at least 14 days after the day on which a response to the notification is served or, if no response is received, at least 28 days after the day on which the notification is served.
- The arbitrator must make an award as soon as reasonably practicable after the parties have put forward their final proposals or the last day on which a party had to submit its final proposal.
- Either party can request an oral hearing which must then be held within 14 days of the date that the arbitrator receives a request.
- Where an oral hearing is held the arbitrator must make an award within 14 days of the conclusion of the hearing.
It is important to ensure that the proposals are realistic, fair and in accordance with the principles set out in the Act (see the section The award below).
Parties must also ensure that notifications, together with the proposal and supporting evidence, are served by 12 August 2022 to ensure that the timescales set down in the Act (for responding and/or revising this proposal with further evidence) may be complied with before a reference may be made.
Note that a reference to arbitration cannot be made where the tenant that owes the protected rent debt is already subject to a CVA/individual voluntary arrangement or compromise arrangement.
The arbitrator: The Secretary of State has approved various arbitration bodies to administer the arbitrations in accordance with the Act and must maintain and publish a list of approved arbitration bodies. Each of those bodies is required to publish the fees that it will charge for dealing with the arbitrations.
The award: The arbitrator may only continue with the reference if he or she is satisfied that:
- it is in respect of a business tenancy;
- there is a protected debt; and
- the tenant's business is viable or it would be if it were to be given relief.
Viability is deliberately not defined in the Act or the (at the time of print, still, draft) guidance as it will vary from business to business and a wide range of tools should be used to assess and stress test profit information and forecasts provided by the tenant to make a judgment on viability.
In making the award the arbitrator must consider which of the proposals put forward best follows the principles in section 15 of the Act which are:
- Preserving or restoring and preserving the viability of the tenant's business so far as that is consistent with preserving the landlord's solvency; and
- If possible and the tenant's business can sustain it, that the tenant should be required to settle the protected rent in full and without delay.
The arbitrator is directed to look at the detailed financial position of both parties including assets and liabilities, previous rental payments made by the tenant, the impact of coronavirus on the tenant's business and anything else he/she considers relevant (for example group structures and dividends paid out). He/she must disregard anything engineered to improve the landlord or tenant's position at arbitration and any possibility of either party borrowing money or restructuring its business. So, the arbitrator is tasked with a balancing act, taking into account all of the available information to arrive at a sharing of the financial burden that is fair and proportionate for each party.
The arbitrator must then decide which of the proposals best meets the principles in the Act. If only one of the proposals is consistent with the principles, the arbitrator must make the award set out in that proposal. This acts to dissuade the parties from adopting unrealistic positions since a proposal which is inconsistent with the principles will be disregarded. If neither party's proposal is consistent with the principles, the arbitrator may make an award they consider appropriate to meet the principles.
As well as writing off the protected debt the arbitrator could also put in place a plan for repayment over a maximum two year period starting from the date that the award is made. Awards of this nature are to be taken as altering the terms of the tenancy in relation to the protected debt.
The arbitrator must also make an award on the costs of the arbitration and can split this cost between the landlord and the tenant as he/she sees fit. The Act states, however, that each party must bear its own legal costs and that legal or other costs are not recoverable by virtue of any term of the tenancy.
Unless otherwise agreed between the parties, awards will be published to ensure consistency (although they will not create binding precedents).
Moratorium on enforcement of protected rent debts: The Act provides for a moratorium period in respect of the protected debt commencing on 24 March 2022 (the day the Act came into force) and expiring either 6 months from 24 March 2022 where no reference to arbitration is made in that period or, where the protected rent debt has been referred to arbitration, the date that the arbitration concludes (the Moratorium Period).
During the Moratorium Period a landlord is prevented from exercising the remedies set out below in respect of any protected debt:
- Making a debt claim in civil proceedings including by way of counterclaim.
- Using CRAR. If the landlord seeks to use CRAR in relation to an unprotected rent debt, the protected debt is to be disregarded when calculating the net unpaid rent.
- Enforcing a right of re-entry or forfeiture. The Act specifically states that no conduct by or on behalf of the landlord during the moratorium period other than an express waiver in writing is to be regarded as waiving a right of re-entry for non-payment of the protected debt.
- Using a tenant's deposit. If the landlord previously drew down on the deposit in respect of now protected rent debt before commencement of the Moratorium the tenant cannot be required to top it up.
- Opposing the grant of a new lease pursuant to the Landlord & Tenant Act 1954 based on unpaid protected rent debt.
- A landlord must also apply any monies received by the tenant during the Moratorium Period for the protected rent debt to any unprotected rent debt first.
Insolvency: The Act sets out various new restrictions on insolvency action which are set out below:
(i) Company voluntary arrangements
There are temporary restrictions on initiating certain insolvency arrangements where a protected rent debt has been referred to arbitration. These commence from the day on which the arbitrator is appointed. The end date depends how the arbitration has concluded. Where an award is made in accordance with the Act and there is no successful appeal that period comes to an end 12 months from the date of the award.
During this period no proposal for a CVA, an individual voluntary arrangement or an application for a compromise arrangement can be made in respect of the protected rent debt.
(ii) Winding-up petitions
From 1 April 2022 there will be new restrictions on winding-up and bankruptcy order petitions based on protected rent debts..
During the Moratorium Period for the protected rent debt a landlord is prohibited from presenting a winding up petition unless the landlord is owed a debt by the tenant company which is not a protected rent debt.
(iii) Bankruptcy petitions
From 1 April 2022 a landlord may not present a bankruptcy petition against an individual tenant where:
(i) the demand related to any protected rent debt and was served in the period from and including 10 November 2021 to and including 24 March 2022 (ie the day before the Act was brought into force) (the Relevant Period); or
(ii) the judgment or order upon which the petition is based related to a protected rent debt and the claim was issued by the landlord in the Relevant Period.
The Act states that if a petition is presented in either of these circumstances the Court may make any such order as it thinks appropriate to restore the position to what it would have been had the petition not been presented.
The restrictions on bankruptcy petitions are to be regarded as having come into force on 10 November 2021 which means that an individual tenant could apply to have any petitions that are already in process stayed pending arbittration in relation to the protected rent debt.
The Act also states that any bankruptcy order which has already been made in relation to a protected rent debt during the Relevant Period is to be regarded as void and the Court again has a discretion to make any such order to restore the position to what it was immediately before the petition which led to the bankruptcy order was presented.
Debt claims and judgments from 10 November 2021: The Act makes provision for debt claims issued by landlords which include the protected rent debt and which have been issued in the Relevant Period.
Either the landlord or tenant may apply to have those proceedings stayed to allow the matter of the protected rent debt to be resolved (whether by arbitration or otherwise, presumably agreement). The Court must then stay the proceedings unless it is satisfied that they are not proceedings that are caught by the Act.
Where judgment has been given in favour of the landlord during the Relevant Period in respect of a protected rent debt and the judgment remains unpaid then:
- The matter of relief from payment of the judgment debt as far as it to relates to the protected rent debt may be dealt with by arbitration under the Act or by agreement, despite the judgment having been given;
- The judgment debt so far as relating to the protected rent debt may not be enforced by the landlord before the end of the Moratorium Period for the protected rent debt; and
- If relief from payment is awarded or agreed the judgment will be taken as altered in accordance with the award.
Where the judgment relates solely to protected rent debt where relief from payment has been awarded and the moratorium period for the protected rent debt has ended the Court must send a request to the Registrar to cancel the entry in the register of judgments and the registrar must then cancel the entry.
In these provisions in the Act relating to debt claims and judgments "tenant" is given a wide meaning and includes a guarantor, any person liable for the payment of rent on an indemnity basis and any former tenant who remains liable to pay the rent.
What about claims issued prior to 10 November 2021?: The Act does not deal with Court proceedings which started before 10 November 2021 and on the face of it, these should therefore be allowed to continue. That said, where the proceedings relate to protected rent debts then it may be possible for tenants to persuade the Court to exercise its general discretion to stay these pending arbitration under the Act.
What action is available now in respect of non-protected rent debts?
All coronavirus restrictions in relation to the recovery of non-protected rent arrears have now come to an end and landlords will be free to pursue the usual remedies in whichever way they see fit to recover those debts.
The updated Code of practice for commercial property relationships following the Covid-19 pandemic continues to provide guidance in relation to resolving disputes through negotiations and settlement. However, if that is not possible, remedies include forfeiture, CRAR, recovering rent from sub-tenants direct or former tenants who remain liable, issuing proceedings for a money judgment or pursuing an insolvency process.
The coming into force of the Commercial Rent (Coronavirus) Act 2022 marks a narrowing of the restrictions on enforcement action by landlords, two years after general restrictions were imposed to protect tenants who had been forced to close their businesses and were struggling to pay rent as a result of the pandemic.
If you require advice in relation to any rent arrears and/or the new arbitration scheme please contact us.