Over the past 15 months, since March 2020, commercial rent arrears have increased to unprecedented levels in the UK. And, with Government restrictions still being applied to some of the usual remedies to recover rent arrears for commercial landlords, it's all the more important for landlord and tenant disputes to be settled quickly, through negotiated agreements for the future.
Recent announcements have indicated that new legislation is likely to be published in the coming months, which could force landlords and their tenants into binding arbitration rather than going to Court. This will impact any arrears discussions and potentially put landlord and tenant relationships and enterprises at risk.
Given this situation, our expert team of property litigation and debt recovery specialists will work with both parties to try and achieve mutually beneficial agreements and will provide support during these negotiations. As such, we've put together this useful guide to give you all the information you need as a commercial landlord or tenant, to help you take the necessary steps to avoid further financial complications and build a lasting relationship that protects both of your enterprises.
The current situation
The Coronavirus Act 2020 initially gave a three-month moratorium on forfeiture of lease due to rent arrears in respect of commercial property in England, Wales and Northern Ireland. This was due to expire on 30 June 2021, but following the Government's announcement on 16 June, this has now been extended to 25 March 2022. The current moratorium on action by landlords to recover rent arrears via bailiff action under the CRAR process has been similarly extended. These extensions mean commercial landlords are now faced with further delays in rent collection for arrears accrued during periods of enforced closure during the pandemic.
It's important to note that the moratorium does not excuse tenants from paying their rent during the pandemic. All commercial tenants remain liable for payments due since March 2020.
So far, many commercial landlords have been successful in negotiations with their tenants for new, improved lease agreements that align better with current financial situations. It is possible these successful rent concessions could have followed the Government's publication of The Code of Practice for Commercial Property Relationships in June 2020. A key takeaway from this documentation was that tenants were (and still are) required to be transparent with their landlords regarding their finances, although the code itself has not been seen as a mandatory order.
In the Government's recent announcement, it was declared that new legislation will be introduced in the coming months to ring-fence arrears which have built up while commercial tenants were forced into temporary closure due to successive pandemic lockdowns. It is still expected that landlords and tenants will try to negotiate agreements in terms of all arrears relating to COVID-19, but naturally, not all negotiations will result in success. To address this, the Government advised that a new legally binding arbitration process will be introduced for landlord and tenant disputes that have yet to be resolved.
No date has yet been given as to when this proposed legislation will be published but it is expected in Autumn 2021, which is why we strongly encourage commercial landlords and tenants now to seek legal advice early on in their negotiations. It is expected that tenants who can pay should pay. We understand the difficulties involved with securing early settlement of these types of disputes between landlords and tenants, but it is even more important to try to achieve this quickly, otherwise, both parties risk being forced into binding arbitration later this year.
What can commercial landlords do?
We understand the importance of generating income quickly and efficiently, particularly given the financial crisis following COVID-19. We also know it's crucial for any commercial landlord to protect their capital value and maintain bank interest covenants; it's a case of striking a balance between these that can be challenging at the moment.
Any commercial landlords facing rent arrears resulting from the pandemic have a number of options to consider. This currently includes starting Court proceedings for recovery of rent. Nevertheless, it is always better to first explore with your tenant whether both parties can find a solution to which they agree to commit. Where problems occur is when tenants assume/expect their landlords to offer reduced rent (under false assumptions that they can afford to do so). This risks placing landlords into a negative cash situation with their tenants. These are the sorts of issues that can cause disagreements between both parties, which could put successful negotiations at risk.
Risk of insolvency
Many landlords will accept that negotiations and rental concessions are crucial to long-term financial stability. Being able to reach mutual agreements is important to allow tenants to continue their business, given that finding replacement tenants who can afford to pay (and who aren't still reeling from the pandemic) can be challenging.
If landlords were to lose tenants to insolvency in this current climate the costs of going through the insolvency process are high, and they would potentially need to survive with empty premises and be liable for business rates.
Some landlords may nevertheless choose to adopt a debt recovery strategy. It's widely known that many commercial landlords or tenants do not look upon debt proceedings favourably, as reputational damage can be a factor. There is currently no bar on landlords starting debt proceedings in the Court – and they may decide to still do so and risk them being stayed to arbitration if they are not concluded by the time the proposed new legislation becomes law. Landlords will normally be able to include within their proceedings a claim that their tenant pays their legal costs as well.
We have a team of debt recovery specialists who can help if you wish to start the recovery of debt proceedings against your tenant.
What can commercial tenants do?
Many commercial tenants have felt the financial strain of the pandemic lockdowns, and equally the strain it has posed on relationships with their landlords. We understand the priority for all tenants is their business, and how important it can be to ensure they can keep trading from their current premises to enable business as usual.
Throughout the moratorium, tenants have been encouraged to pay as much as they can afford and give their landlords as much financial transparency as possible. The Code of Practice says as much, with the concept of enabling landlords to provide appropriate support wherever they can, to avoid any insolvency proceedings or bad faith between parties. Unfortunately, the Code as we know does not have any teeth as it is not mandatory legislation.
This means there are still many tenants who are yet to agree on concessions with their landlords. From our perspective, it's advisable that any commercial tenant looking to negotiate in this way should take note of what the Code outlined, and to consider providing details of their financial information to their landlord in negotiations.
We also strongly advise commercial tenants to get in touch with our team, so we can give appropriate legal advice to support them throughout the negotiation process.
It's worth noting the importance of trust here too. If trust is broken down between landlord and tenant due to unwillingness to share information or at least trying to negotiate properly with transparency, this is likely to form a barrier to success.
What happens after 25th March 2022?
Regardless of the moratorium, tenants are still expected to pay their rent whether it fell due during the pandemic or afterwards. The impending arbitration process will only apply to pandemic arrears, and there is every chance that the actual legislation (once published in the Autumn) may include various exemptions so that some tenants may still be at risk of action for pandemic arrears. There will naturally be questions from both parties, and unfortunately in the meantime, the Courts are choked with a significant backlog of rent proceedings. There is a large value of unpaid rent locked up in those proceedings.
It is clear that commercial tenants are expected to “sort out their differences” by early negotiations with their landlords themselves, otherwise, they risk facing the consequences of either Court action or forced arbitration.
It's important to note all tenants could still be sued for arrears accrued for non-payment of rent during the pandemic. If a tenant and their landlord are forced into binding arbitration, this process is only likely to cover arrears accruing due throughout the pandemic. That also means tenants are still liable to face proceedings for post–pandemic rental payments (as they are not likely to be subject to the arbitration process in any event) which could leave them in a worse financial state than if they'd agreed to concessions with their landlord.
Breathing Space: The Debt Respite Scheme
On 4 May 2021 the Government introduced “Breathing Space”, a debt respite scheme that gives some debtors legal protection from their creditors. Standard breathing space is available to anyone with problem debt; it gives them legal protection for up to 60 days. There is also breathing space available to certain individuals on mental health grounds.
Some commercial tenants who are individuals may qualify for this.
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.