UK: Legal Update – Commercial Rent Arrears Update

Further to our previous updates in June 2021 (https://www.quastels.com/commercial-rent-arrears-latest-news/) and November 2021 (https://www.quastels.com/legal-update-commercial-rent-arrears/), the end of March 2022 has seen:

• an end to the temporary protective measures in place for tenants that struggled to pay rent during Coronavirus pandemic; and
• the establishment of a new arbitration scheme concerning ring-fenced commercial rent arrears in respect of amounts accrued during periods of mandated closure pursuant to the Commercial Rent (Coronavirus) Act 2022 ("the Act") which received royal assent on 24 March 2022 (Commercial Rent (Coronavirus) Act 2022 (legislation.gov.uk)).

We briefly consider these changes below:

Moratorium on forfeiture

The moratorium on forfeiture of commercial leases for non-payment of rent (or other sums due under the lease such as insurance, interest or service charge) ended on 25 March 2022, two years after it was originally enacted.

Commercial landlords are now once again able to consider forfeiture for the non-payment of rent, including rent that accrued during the last two years. However, commercial landlords are still prohibited from enforcing in respect of specific ring-fenced debt (see arbitration section) for the next 6 months. Accordingly, care must be exercised when considering the nuclear option of forfeiture, particularly if a commercial tenant has a reasonable argument to suggest forfeiture action is precipitous.

Restrictions on CRAR

The restrictions on the use of the Commercial Rent Arrears Recovery ("CRAR") procedure have been lifted from 26 March 2022. CRAR enables landlords of wholly commercial premises to recover rent arrears through the seizure and sale of tenant goods. Under the Regulations, CRAR could not be utilised unless a tenant owed at least:

• 276 days' rent arrears for action taken before 24 December 2020;
• 366 days' rent arrears for action taken from 25 December 2020 to on or before 24 March 2021;
• 457 days' rent arrears for action taken from 25 March 2021 to on or before 23 June 2021; and
• 554 days' rent arrears for action taken on or after 24 June 2021 to on or before 25 March 2022.

The threshold has now been reduced to the pre-pandemic position of seven days' rent arrears (of principal rent, not including other sums due under the lease). Commercial tenants with rental arrears above the seven-day threshold should be aware that landlords once again have a statutory right to enter the commercial premises, take control of goods and sell them to apply the funds towards the rent owed. As stated above, this is strictly subject to the ring-fencing provisions so commercial landlords will not currently be able to exercise this function in respect of arrears that accrued during periods of mandated closure.

Winding up petitions

From 1 April 2022 commercial landlords will once again be able to serve statutory demands and winding up petitions where the debt is at least £750. This is a further relaxation of the measures introduced by the Corporate, Insolvency and Governance Act 2020 which increased the debt threshold to £10,000. As stated above, this is strictly subject to the ring-fencing provisions so commercial landlords will not currently be able to exercise this function in respect of arrears that accrued during periods of mandated closure.

Government supported negotiation

The above measures were primarily introduced by the Government to help businesses that were struggling to pay rent as a direct consequence of the Coronavirus pandemic.

If commercial landlords and tenants have not yet reached an agreement in respect of rental arrears (notwithstanding that a landlord may [subject to any ring-fencing restrictions] be able to take immediate enforcement action) they are expected to follow the Code of Practice for commercial property relationships following the COVID-19 pandemic ("Code") (see our previous update published in November 2021) that encourages the parties to work collaboratively in an attempt to resolve the issue of outstanding arrears.

Arbitration procedure

The Act has now established a binding arbitration scheme where negotiations have failed in respect of arrears (which includes rent or any other sums due under the lease) relating to businesses that were mandated to close (in full or in part) from March 2020 to the date when restrictions ended for their relevant sector.

Under the Act, arrears that accrued from 21 March 2020 to the date when the specific Coronavirus restrictions affecting the relevant sector ended are classified as a 'protected rent debt' and are now ring-fenced for a further six months (until 24 September 2022). For example:

(Note: the periods of mandatory closure differ in Wales)

This means that a commercial landlord is prohibited from commencing enforcement action in respect of such arrears. Debts that accrued at other times (not within a period where a business was mandated to be closed) will not be within the scope of the Act and therefore commercial tenants need to be alive to the risk of enforcement action for any debts that accrued outside of the periods of mandated closure.

Landlords and tenants remain encouraged to negotiate and reach agreement. If the parties cannot agree, either the landlord or the tenant can refer the dispute for arbitration until 24 September 2022.

A brief chart of the arbitration procedure:

The landlord or tenant are entitled to apply directly to any approved arbitration body (Arbitration bodies selected to manage rent related disputes – GOV.UK (www.gov.uk)) The arbitrator will make a binding award taking into consideration the preservation of the tenant's business (but not at the expense of the solvency of the landlord) and affordability. Arbitrators may award a reduction of protected rent debt and/or time to pay, with a maximum period to repay of 24 months.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.