Since the onset of Covid-19, numerous restrictive measures have been introduced by the UK government to mitigate the financial impact on businesses. The New Code introduced on 9 November 2021 and the draft Commercial Rent (Coronavirus) Bill (“the Bill”) are considered here. The impact on the landlord-tenant relationship will be more far-reaching than previous provisions and guidance, which essentially bought time for tenants in difficulty, by potentially relieving tenants from their obligations under the agreed contract between the parties.
Some tenants may seize upon the changes as a device to write off debt, but the reality is more nuanced and landlords should not be left thinking the changes are as tenant-friendly as might appear at first glance. In fact, tenants may ultimately be disappointed by the fairly narrow, evidence-based requirements. Landlord strategy should be case specific and is incremental over time as set out below, but the starting point is that a tenant should pay if they can pay. Whilst the details of the Bill are yet to be finalised, the general structure is relatively clear.
Pre 9 November 2021
The Code of Practice for Commercial Property Relationships During the Covid-19 Pandemic (“the Old Code”) was guidance only and encouraged parties to reach agreements to ease the burden on tenants, but at its core required a tenant who was in a position to pay rent, to pay.
Legislative changes introduced moratoriums preventing landlords taking the following action:
- Forfeiture of commercial leases for rent arrears – extended to 25 March 2022
- Commercial Rent Arrears Recovery (CRAR) – extended to 25 March 2022
- Winding-Up Petitions – restrictionsremain for debts incurred during the pandemic – extended to 25 March 2022
Post 10 November 2021
In August 2021, the government published its “Supporting businesses with commercial rent debts: policy statement” setting out a clear intention to legislate on:
- Ringfencing commercial rent debt accrued from March 2020 during the pandemic by businesses affected by enforced closures; and
- A process of binding arbitration between landlords and tenants.
The New Code
The Code of Practice for Commercial Property Relationships Following the Covid-19 Pandemic, published 9 November 2021 (“New Code”) is effective immediately. It replaces the Old Code and, as before, gives guidance and “best practice” on the approach commercial landlords and tenants should adopt in negotiations about payment of Covid-19 related commercial debt.
The New Code is voluntary but similarly encourages landlords and tenants to reach a resolution prior to the Bill being enacted (anticipated March 2022), in respect of Covid-19 debt owed due to premises being subject to closure or other restrictions. Whilst not binding, parties are encouraged to comply and settle debts before the impending arbitration scheme is passed into law.
The New Code explains the scope of the Bill and the impending arbitration process and the principles and behaviours expected before and during the new arbitration regime. It is important to note that whilst the New Code is voluntary, once the Bill is passed the new legislation will have retrospective effect (as to which see further below).
Key Concepts
- Protected Period – The New Code and Bill are aimed at protecting debt accrued when premises were mandated to close or cease trading (in whole or part), for specified periods during the pandemic from 21 March 2020 to 18 July 2021 (in England). The end date could be sooner depending on when restrictions were lifted according to sector. Annex A of the New Code summarises the relevant periods and the nature of the affected businesses. It is not a one size fits all approach and the variations are key and a detailed case by case analysis will be required to determine which unpaid rent payments will fall within the new regime.
- Protected Rent Debts – This includes rent, service charge, insurance, VAT and interest under a business tenancy, and all payments in respect of the occupation of the property are treated as rent. A debt will be protected if “rent is attributable to a period of occupation by the tenant for, or for a period within, the protected period”. That suggests that the rent is apportionable so that part of a quarter’s rent or service charge may be protected and part not.
- Scope – Only businesses which were required to close (rather than preferred to close or found it unprofitable to open) are within the scope of the proposed arbitration scheme. For example pharamacies and grocery shops were not required to close, so will fall outside the scheme.
- “Closure requirement of specific coronavirus restriction” – Within scope are businesses that were partially open and able to trade. For example cafes/restaurants operating only for collection, or operating with restrictions on table booking size or requirements for customers to eat while seated are covered.
- Tenant’s business viability v. landlord solvency – preservation of the tenant’s viability must be balanced with the solvency of the landlord. Viability is not defined in the Bill, but it is not to be equated with affordability or profitability.
Headline Points
- Landlords can still point to the New Code which states that where it is affordable, a tenant should aim to meet their obligations under their lease in full (Paragraph 13).
- The expectation remains that tenants who are able to pay their rent debt in full should do so. However, landlords are expected to share the burden where they are able to do so (Paragraph 14).
- The Protected Rent Debt should be ascertained and negotiated wherever possible.
- Unusually, once the Bill is enacted the regime under the new Act will have a retrospective effect, so the New Code cannot be looked at in isolation and must be read with the Bill.
- Existing agreements such as concession letters which cover the Protected Rent Debt, will fall outside of the remit of the intended arbitration.
Restrictions on Landlords
- The final remaining remedy available to landlords (issuing a debt claim) has been removed. Note that this is only for the Protected Rent Debt. This means that if landlords cannot negotiate an agreement in relation to the Protected Rent Debt, they must wait until after 25 March 2022 to arbitrate that element. Debt Proceedings can still be issued in the County or High Court but will be subject to a mandatory stay on application. Debts outside of the Protected Rent Debt are not ring-fenced and can still be pursued (Paragraph 23), but the way the Bill is worded it seems that where a claim covers both Protected Rent Debt and Non Protected Rent Debt the whole claim would be stayed, not just so much of it as relates to the Protected Rent Debt.
- Rent Deposits covering the Protected Debt cannot be drawn down (Paragraph 24). Where the landlord has done this already, the requirement to top up is suspended.
- Landlords are restricted from allocating unspecified tenant payments to the ring-fenced period. If an unspecified amount is, or has been, paid by the tenant following the end of the ring-fenced period, the landlord must use it to cover rent outside the ringfenced period (Paragraph 25).
- Judgments obtained before the Bill is in force are still capable of enforcement, although a tenant could apply for a stay but it is not mandatory and whether to grant a stay would be in the discretion of the court.
25 March 2022 – Arbitration under the Bill
The Bill provides for arbitration and the award of relief in respect of the Protected Rent Debts. Its aim is to facilitate the resolution of disputes ultimately by a binding arbitration scheme. The Bill is in draft and subject to revision, is expected to be passed before 25 March 2022. As drafted it provides for a window of six months from when the Bill is passed within which any references to arbitration must be made.
Headline Points
- The scheme applies to all charges incurred during the ring-fenced Protected Period. Debts incurred prior to 21 March 2020 and after 18 July 2021 (subject to Annex A) are out of scope.
- Paragraph 23 and Schedule 2 of the Bill prevent landlords pursuing Protected Rent Debt during the moratorium period from the date when the bill is passed for 6 months by:
- debt claims in civil proceedings
- CRAR
- re-entry or forfeiture (for rent arrears)
- use of a tenant deposit
- Court proceedings issued after 10 November 2021 are subject to a mandatory stay (if either party applies).
- Court proceedings issued before 10 November 2021 can continue. There is no particular provision under the Bill to stay them, though tenants could still apply, but they would likely have to show a reasonable prospect of success under the Bill to succeed.
- The above restrictions apply to recovery from both tenants and guarantors.
- Enforcement of Court Judgments in respect of protected Rent Debt obtained on or after 10 November 2021 in proceedings commenced after that date cannot be enforced and the judgement debt would fall to be treated as if it were a Protected Rent Debt within the scope of the scheme
- Winding up and bankruptcy petitions are also prevented during the moratorium period (against both a tenant and a guarantor of the tenancy).
- There does not appear to be any restriction on serving a statutory demand.
Arbitration – How will it work?
- If agreement is not reached about Protected Rent Debt, either landlord or tenant can refer the dispute to an arbitrator (approved and appointed by an approved body) seeking resolution.
- Assuming the date the Bill comes into force is 25 March 2022, there will be a 6 month window to apply for arbitration (this Arbitration Window like many other Covid-19 provisions to date is subject to extension)
- Before applying for arbitration, the applicant must notify the other party of their intention to apply for arbitration and both parties should enter into pre-action negotiations setting out (with evidence) their proposals.
- There are exceptions however, and arbitration will not be available, where the tenant is subject to or has proposed, a CVA, IVA, scheme or restructuring plan which includes “protected rent debt”. Notably there are also restrictions on a tenant proposing a CVA, IVA, scheme or restructuring plan that would include “protected rent debt” after the matter has been referred to arbitration.
- The arbitrator cannot be selected, but will be appointed from an approved arbitration body.
- The arbitrator must first asses the viability of the tenant’s business. If it is not viable or would not be viable even if relief were granted, the arbitration should be dismissed. Clause 16 sets out the criteria for considering the tenant’s viability balanced against the impact on the landlord’s solvency.
- The Arbitrator’s Principles at Clause 16 state that the award should aim to preserve or restore the viability of the tenant, balanced with the landlord’s solvency (the viability principle) and that the tenant should (so far as is consistent with the viability principle be required to meet its lease obligations
- The stages and timescales are set out at Annex C of the Code.
- Reference to arbitration by either party must contain a formal proposal (with evidence), triggering a 14 day window to submit a counterproposal. A hearing can be arranged or the arbitrator can make a decision on the papers.
- The decision will be legally binding.
- The arbitrator must consider whether the parties proposals are consistent with the arbitrator’s principles, and if they are he must adopt the proposal that is most consistent with them. It is only if no proposal is consistent with the principles that the arbitrator can decide his own award, which may comprise:
- writing off the whole, part or none of the debt
- giving time to pay
- allowing payment by instalments (within 24 months)
- reducing or cancelling any accrued interest.
Analysis
- The proposed legislation on the face of it represents a shift in favour of the tenant. It is an unprecedented dispute resolution mechanism to determine liability, which would at any other time be unequivocally due.
- However, closer inspection of the detail reveals a heavy burden on the tenant to show (with evidence) that its business requires relief to either remain viable or be restored to viability. This is more onerous than under the Old Code, which was vague in comparison.
- Relief must not prejudice the landlord’s solvency.
- In considering viability or solvency regard must be had to the whole of the tenant’s business and the whole of the landlord’s estate and business, and not just the position regarding the business carried on at the particular premises.
- The Bill makes clear that Unprotected Debt is not within the scheme and as such is open to court proceedings as before.
- Landlords are well advised to continue to send warning letters identifying the arrears, circumstances of closure and having regard to the New Code make a proposal to the tenant.
- As previously, resolution is preferred over litigation and now arbitration. Efforts should still continue to be made with reference to the wording and principles of the Code and draft Bill. Equally, where an impasse occurs, the matter should be escalated and the landlord should be prepared in these cases to instigate proceedings and/or arbitration.
- It is anticipated that most tenants should reach a deal with landlords and there remains a risk of tenants having an arbitration award imposed on them which would be capable of enforcement in the usual way.
- Landlords should continue to focus attention on seeking to resolve rent disputes before the Bill comes into force.
- Landlords should continue to seek financial evidence from the tenant. It is important to note that the date for assessment of viability is the arbitration itself, which (assuming the bill is passed in March 2022) will not be before April 2022, some 9 months after restrictions were lifted by which time it will be possible to assess the effect of the pandemic on the tenant’s business and many business will hopefully have recovered.
- Areas of uncertainty remain for both landlord and tenant and it remains to be seen how arbitrators will deal with the new rules, how consistent awards will be and what happens about the costs of the new regime. Unlike leases which provide for the tenant to bear the landlord’s costs of default, the arbitration envisages that each party bear their own costs.
- All this points to an incentive for both parties to strike a certain deal rather than risk an unknown outcome and on that basis we may see an increase in negotiated agreements to avoid the risk of arbitration.
- Finally, a tenant should not be under any illusion that it can avoid charges during the pandemic just because it’s business was affected by the pandemic. The hurdles are clear and steep. Any relief will only be that which is necessary to preserve or restore and preserve a tenant’s viability. This is far from a carte-blanche for tenants to withhold payment.