Steering stricken landlords and tenants into calmer waters

November 18, 2021

The lockdown periods of the Covid-19 pandemic took a significant toll on commercial property owners (landlords), having faced rent defaults and voids as business occupants were unable to operate and many have had to close their doors for good. Equally, businesses able to continue trading, perhaps helped with staff costs by the Government’s furlough scheme, found that property costs and contractual obligations remained a key concern.

While some form of ‘sharing the pain’ has been the only way to protect the interests of both business landlord and tenant since March 2020, as we begin to return to normality the Government has intervened to try and smooth the way for commercial property to get back on an even keel. The Commercial Rent (Coronavirus) Bill, proposes new legislation and sets out a Code of Practice aimed at resolving commercial rent arrears accrued during the COVID-19 pandemic.

The Code may be found here.

As well as a ban on arrears based forfeiture until 25 March 2022, the Government has also restricted insolvency procedures, including issuing winding up petitions and using Commercial Rent Arrears Recovery (CRAR). If it becomes law, the Commercial Rent (Coronavirus) Bill will ring-fence Covid related rent arrears and direct to a binding arbitration process those debts which cannot be resolved by agreement in accordance with the new Code.

The main points

The Bill applies to rent arrears where:

The tenant was forced to close their premises or cease trading
The lease is a business tenancy, per the Landlord and Tenant Act 1954
The rent accrued during the ‘ring-fenced period’, i.e. from 21 March 2020 when the first restrictions on businesses were established, until the end of restrictions for the relevant business – e.g. if a retailer, a nightclub, etc.

In addition

Landlords will not be able to issue debt claims for ring-fenced arrears altogether until the end of the arbitration application period or the arbitration process.
Landlords will be prevented from petitioning for bankruptcy or liquidation of a business tenant based on a statutory demand for any ring-fenced debt served on or after 10 November 2021 and before the Bill comes into force.
Landlords will not be able to use tenancy deposits to cover ring fenced arrears.

The new Code

This Code provides a more structured framework for negotiation and resolution. It is clearer on what is expected of landlords and tenants:

transparency and collaboration
a unified approach
acting reasonably and responsibly
a swift resolution

The new Code is squarely focused on preserving viable businesses and greater transparency from those tenants on the affordability of proposed concessions. Its test is: “whether ring-fenced debt aside, the business has, or will in the foreseeable future have, the means and ability to meet its obligations and to continue trading”. It is clear that the legislation is only intended to be used as a last resort and businesses who can afford to pay rent in full should do so, even if they were forced to close. The preservation of the business of the tenant should not be at the expense of the solvency of the landlord.

The Arbitration Process

If agreement is not reached, either party can apply unilaterally for the matter to be referred to the binding arbitration scheme introduced by the Bill.

The process starts with a pre-application “letter of notification” by either party including a proposal for the settlement of the arrears in line with the new Code. The other party will then have the opportunity to accept or respond with a counterproposal. If there is still no agreement, an application for arbitration can be made which must include the notification, a proposal for resolution and supporting evidence – including on viability and affordability in the case of a tenant.

The other party then has 14 days to submit its own proposal, together with any supporting evidence following which the parties have the opportunity to submit revised proposals for what the arbitrator’s award should be. The arbitrator’s award will be legally binding and ultimately based on assessing the proposals from both parties in accordance with the Code’s principles of viability and affordability.

As in all our turnaround and restructuring activities at Buchler Phillips, our favoured approach in resolving real estate issues has always been to find constructive solutions in the best long term interests of both parties in a contract very much in keeping with the principles outlined in the proposed Code of Practice. The original Code of Practice for Commercial Property Relationships was published very early on in the pandemic with the objective of encouraging landlords and tenants to co-operate and negotiate “affordable rental agreements” to ensure the survival of those tenants experiencing “severe hardship”.

Unlike several legal advisers, we do not work exclusively with either landlords or tenants. Assignments have been undertaken for both in recent years and this has remained the case during and since the pandemic.

Our focus is far wider than mediation: our team’s first-hand experience of working in property development and investment across many areas of commercial and residential real estate, equips us to develop solutions that benefit all stakeholders.

These may include: