UK: Covid-19 Commercial Rent Arrears – September 2022 Update

April 5, 2022 Article.

Landlords and Tenants will be aware that the moratorium on commercial evictions and restrictions came to an end on 24 March 2022.

The Commercial Rent (Coronavirus) Act 2022 provides a mechanism for Landlords and Tenants to sort out how COVID related rent arrears can be paid, with in full or in part; where previous discussions between them have failed to reach an agreement.

The Act came into force on 24 March 2022 and is explained in the Government's new Code of Practice. It creates a binding arbitration system. There is a strict six month period from 25 March 2022 in which either the Landlord or the Tenant can refer their dispute to an Arbitrator who will decide what repayment terms will be binding on the parties. There are a number of arbitration bodies who have been approved by the Secretary of State to carry out this work.

The hope had been that Landlords and Tenants would be able to resolve the issues by direct discussions using the principles in the Code of Practice, but there was also concern that with the lifting of the moratorium, there would be a "free for all" of litigation leading to the closure of businesses that might otherwise be viable. For those Landlords and Tenants who have already reached a legally binding agreement about the rent arrears; those agreement will remain binding.

Is my business eligible?

To qualify for the arbitration scheme, a commercial tenant must first be able to show that its business has been directly adversely affected by the Government's Coronavirus restrictions – such as being subject to forced closures or 'the rule of 6'.

The Tenant's business must also currently be financially viable or will become viable if an arbitration award either reduces the rent arrears to be paid or schedules them for repayment over time. A business that was not viable before the pandemic or is unlikely to be made by viable by an award, will not be successful.

What type of rent arrears is covered under the Scheme?

The rent arrears owed must be deemed a 'Protected Rent'. This is rent that ought to have been paid during the period of forced closures or where government restrictions were in place which restricted a Tenants' trade due to COVID. That protected period can differ depending on the dates that closures were in place for types of businesses. For many businesses, the Protected Rent will be that due between 21 March 2020 and 18 July 2021 when most restrictions were in place.

What should I do as a Commercial Tenant/Landlord?

If you have not engaged in discussion to try and resolve the rent arrears, you should still try to do so but bear in mind the six month limit for applying for arbitration. If discussions have been ongoing but no resolution agreed, then either party can notify the other in writing that it intends to apply for arbitration and supply a proposal with supporting evidence. The other party then has 14 days to respond and make any counter offer with supporting evidence.

Once that 14 day period has expired [28 days if there is no reply to the notification] and assuming no agreement has resulted from the information and offers made; then either party can apply for a formal arbitration. The application must include a formal proposal and supporting evidence as to what that proposal is considered appropriate and pay the arbitrators fee.

What happens if I refer to arbitration?

The Arbitrator will check that the case is eligible under the Act and the other party has 14 days to put forward its own formal proposal with supporting evidence. Each party gets the chance to submit revised proposals and can agree that there be an oral Hearing or that the Arbitrator will decide the case on a paper basis. If there is a request for an oral hearing, that hearing must be held within 14 days of the Arbitrator receiving the formal request.

The Arbitrator must make their Decision within 14 days of the oral Hearing; or if it is to be dealt with on a paper basis; within a reasonable period. The Arbitrator can also order that the fee (paid up front by the applicant) should be split equally between the parties. If the parties have incurred other legal costs, they will pay those themselves regardless of the Decision; and it seems, regardless of any clause in the Lease that might otherwise have permitted the Landlord to recover its costs of pursuing rent arrears from the Tenant.

The Arbitrator can decide how and when the Protected Rent should be repaid. If the Arbitrator decides on the evidence that the Tenant is not viable and would not become viable as a result of any award, they can dismiss the application. The Landlord is then free to use other legal means to recover the unpaid rent or repossess the premises.

The Government estimates 15,500 businesses to be eligible and anticipates just under half will apply to attend an arbitration under the Act. It hopes that all arbitration cases will be resolved between 3 and 15 months under this new scheme.

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.