Following the latest government announcements, where do landlords and tenants stand in relation to the recovery of rent unpaid during the Coronavirus pandemic?
The simple answer is there is a significant degree of uncertainty, and an awful lot of detail around the government's proposals and that has yet to be resolved.
Summary of the current position
Following the government's announcement on 16 June 2021 outlining its intentions (some of the detail of which is considered further below) what we do know is:
- Landlords and tenants will be legally obliged to negotiate rent relief packages and to submit to binding arbitration if agreement cannot be reached. Consultation proposals suggest that arbitrators will have far-reaching and potentially disruptive powers to vary lease terms.
- The moratorium on forfeiting leases for non-payment of rent has been extended to 25 March 2022 in England, but only to 30 September 2021 in Wales. There was an indication that the moratorium will apply only to non-payment of rent relating to lockdown periods, but details of how this will operate have not been published even though the extension of the moratorium has been made.
- The extension of the moratorium on forfeiting leases also extends the period during which the restrictions on exercising rights of commercial rent arrears recovery apply. Restrictions will continue to 25 March 2022 (30 September 2021 in Wales) but the government has indicated that the number of days' rent that must be outstanding before the rights can be exercised will remain at 554 days.
- The moratorium on serving statutory demands for unpaid rent and then commencing winding-up proceedings has been extended until 30 September 2021 (for now). From 1 October there is currently nothing preventing a landlord serving a statutory demand and then commencing winding up proceedings (whether this is in relation to arrears which accrued prior to 30 September 2021, or which subsequently arise). The ending of the moratorium will remove the defence to a winding-up petition that Coronavirus had an impact on the company's ability to pay its debts.
Negotiate or else!
Earlier this year, the government issued a consultation paper on how the ending of the various moratoria on the enforcement of leases should be handled to prevent a cliff-edge ending. Whilst the outcome of the consultation has not yet been published, the government has said that legislation will be brought forward in this session of parliament imposing a statutory obligation on landlords and tenants to negotiate rent-relief packages to cover the pandemic period (something which a number of landlords and tenants have of course been doing/have done since March 2020). If packages cannot be agreed by a (to be announced) backstop date, landlords and tenants will be required to submit to binding arbitration that will impose a rent-relief package. The consultation issued by the government suggested that arbitrators would have the power to:
- Waive a proportion of rent arrears;
- Waive a proportion of service charge arrears;
- Give additional time to pay arrears (whether reduced or otherwise);
- Give additional time to pay service charge arrears (whether reduced or otherwise);
- Reset future rent under the lease;
- Extend the term of the lease;
- Reduce the term of the lease;
- Defer/waive obligations to replenish rent deposits.
At present, we do not know if all commercial leases will be subject to this process. The government announcement referred to provisions applying "... when a business has had to remain closed during the pandemic." How widely or narrowly this will be defined remains to be seen.
There could be a deluge of arbitration cases. It is not known whether there are enough suitable trained arbitrators who are able and willing to hear the claims that have to be determined under the new legislation.
The proposed powers in relation to leases are incredibly wide-ranging. The property industry urgently needs to understand how this process is intended to work, what the parameters will be around the exercise of the arbitrators' powers and, of course, exactly what the foundation of this scheme actually means – that is, what do we mean by a failure to "negotiate rent-relief packages to cover the pandemic period".
Many landlords and tenants have already negotiated and settled some/all arrears covering the period(s) of lockdown. If they have only settled some arrears, are they still caught by the proposals? Even if they have settled all arrears and come to an agreement covering the entirety of lockdown and beyond, can those agreements be opened up again if one party wants to?
Equally uncertain is how the government proposes to ringfence pandemic related arrears for the purposes of forfeiture, CRAR and whether the ringfencing will apply to statutory demands and winding-up procedures as well.
Unfortunately, at this point, we have more questions than answers....
Originally published by Shoosmiths LLP, 30 June 2021
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.