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Dealing with commercial rent arrears
01 Dec 2021
KK Thompson Solicitors recently delivered a webinar on dealing with commercial rent arrears following the pandemic and the options available to tenants.
Much of that practical advice remains relevant, however, since then the Government has announced how it intends to address the unprecedented rental arrears that have accumulated in the commercial property sector since the beginning of the pandemic.
The note below is relevant to those tenants who through no fault of their own have fallen into arrears as a result of the pandemic and need practical solutions for repaying any outstanding sums.
Up until recently what was the position?
• Since March 2020, the government placed a number of restrictions on commercial landlords seeking to recover rent arrears from their tenants (including restrictions on forfeiting commercial leases).
• Most of these restrictions are due to expire on 25 March 2022.
There are three new key elements to consider:
1. A new Code of Practice to guide landlord and tenant negotiations around rent arrears has been introduced with immediate effect. The Code sets out that in the first instance, tenants who are unable to pay in full should negotiate with their landlord in the expectation that the landlord waives some or all rent arrears where they are able to do so.
2. Draft legislation in the Commercial Rent (Coronavirus) Bill has been published which includes details of the proposed binding arbitration process. The legislation is yet to be finalised, but is expected to come into force before current tenant protections expire on 25 March 2022, however it could be sooner. The Bill will seek to establish a legally-binding arbitration process for commercial landlords and tenants who have yet to reach an agreement regarding outstanding rent arrears following the principles in the Code of Practice.
3. Further restrictions have been imposed on the landlord remedy of Court proceedings to pursue tenants for unpaid rent.
It would seem that the proposals are trying to strike a balance between the interests of landlords and tenants, however its main purpose is to assist tenants who have viable businesses but through no fault of their own are unable to repay Covid rent arrears immediately and in full.
Appointed arbitrators will be given wide discretion when considering and determining whether they have jurisdiction to deal with a referral, any reliefs granted to the tenant, and costs. It would seem that most of the proposals in the draft legislation will expire within six months following implementation. The general consensus being that the Government appear to be moving towards business as usual by September 2022, however, as with everything following Covid, this continues to be a moving target.
Set out below is a summary of the key points from the new Code and draft legislation:
• If tenants are in a financial position which will allow them to pay the rent, they should. However, if they are unable to do so but their business is viable, or would be but for the impact of the pandemic, concessions should be considered and granted with reference to what either party can afford. If any other agreements have been entered into dealing with arrears, these will not be affected by the Code or legislation and they will remain enforceable.
• If parties cannot reach an agreement, then it’s up to either party to refer the dispute to an arbitrator, however, there are certain procedural steps which should be taken before referring the matter to arbitration. Parties will have a six month window from the date of the legislation to make a referral (intended to be 25 March 2022 to 24 September 2022).
• If commercial rent arrears have arisen as a result of coronavirus, they will be classed as “protected” if they fall within the period from 21 March 2020 up to the date mandatory restrictions in that sector ended, or 18 July 2021, whichever is earlier. So for non-essential retailers which re-opened on 12 April 2021, for example, the period would end on 12 April 2021. Arrears that accrued at any other time will not be protected.
• Landlords will not be able to take court action to pursue commercial tenants for “protected” pandemic rent arrears only. This is the position from 10 November 2021. Other rent arrears (i.e. before or after COVID restrictions were in place) are not affected.
• Restrictions apply to Landlords when dealing with deposits and thus landlords are prevented from drawing down rent deposits in respect of “protected” pandemic arrears. If a deposit has already been drawn down, the tenant will not have to top it up until September 2022.
• The current restrictions in place on landlord’s enforcement options will continue, these include commercial rent arrears recovery (CRAR), forfeiture and winding up petitions. The draft bill alludes to these restrictions being lifted in September 2022, although this new later date only applies to “protected” pandemic rent arrears and not arrears that fall outside the COVID window between March 2020 and the lifting of restrictions.
• It is recommended that when tenants come to pay rents, they should specify which period of rent is being paid for. If the tenant does not specify, landlords must use it to cover rent outside the relevant period, thus maximising protection afforded to tenants.
To date, limited information has been released, therefore further details of the new Code and draft Bill will be published in due course. However, if any members are in a position where they are unsure how to deal with any arrears, the above provides a flavour of how forthcoming legislation will affect your situation.
Should you require any further information on the above or should you have any specific property queries, please do not hesitate to contact either Kate Thompson or Karl Thompson Directors and Co-founders at KK Thompson on 0333 011 8626.
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