Abi Lutey, Partner and Head of Commercial Disputes at Coodes Solicitors, discusses the position on commercial leases following the introduction of the Commercial Rent (Coronavirus) Act 2022.
The Commercial Rent (Coronavirus) Act 2022 received Royal Assent on 24 March 2022 and is now enshrined in law. This follows a long period of commercial landlords being restricted in taking action against business tenants.
The moratorium on evictions – business closures and pandemic restrictions
During the pandemic, as we know, many businesses were forced to close their doors by the Government. Commercial tenants were afraid of their businesses failing because they were unable to pay their rent and landlords also struggled to cope with falling rental income.
The Government quickly stepped in to impose several restrictions, including:
- Limitation on the use of Commercial Rent Arrears Recovery (CRAR). This was extended many times during the pandemic until 25 March 2022.
- Restrictions on the use of statutory demands that related to rent arrears, under the Corporate Insolvency and Governance Act 2020. These restrictions remain in place until 31 March 2022.
- A temporary freeze on evictions, known as a moratorium on the forfeiture of leases for rent arrears (s82 (1) under the Coronavirus Act 2020. This also included the opposition of a new tenancy for non-payment of rent. The moratorium period was extended many times during the pandemic but ended on 25 March 2022.
How did it work?
In July 2020, the Government introduced a Code of Practice to help landlords and tenants manage arrangements during the pandemic. The code made it clear if tenants could pay their rent, they should do so. Many businesses were offered concessions by their landlords and other landlords and tenants worked together to reach agreements. However, a number of high profile tenants unfortunately had taken advantage of the restrictions.
Landlords were still able to bring proceedings in the County Court for non-payment of debt and could make use of rent deposits. Those claims were brought during the period were largely successful, despite tenants running defences based on the impact of the pandemic.
What will happen with commercial leases after 25 March 2022?
It was feared that simply opening the floodgates on 25 March would lead to the Courts becoming more overburdened. There is a backlog of cases with landlords waiting to recover unpaid rent. More importantly, some tenants, who had managed to keep trading as a result of the restrictions imposed, were potentially subject to forfeiture action after the moratorium was lifted.
The restrictions were always intended to be temporary. That is why the Government has introduced the Commercial Rent (Coronavirus) Act 2022 to determine what happens next now that those restrictions have been lifted
TheAct, which came into force on 24 March, has been introduced to help settle cases relating to certain debts under business tenancies that were adversely affected by Coronavirus.
Under the new law, commercial landlords and tenants must enter into a binding arbitration process to deal with disputes that have arisen in relation to rent arrears that have accrued where the tenant’s business was forced to close by the Government as a result of the Covid-19 restrictions.
There are a few key points to note about the Commercial Rent (Coronavirus) Act:
- The legislation will only apply to business tenancies where the business was mandated to close either in part or full.
- Landlords and tenants that have reached a concessionary agreement during the pandemic will not be able to arbitrate over rental arrears that built up during that time.
- The rent must be owing from the ‘protected period’. This is between 21 March 2020 and the last day the business was forced to close or 18 July 2021 (whichever is earlier).
- Debt, which is protected subject to arbitration, will become ring fenced. This means that landlords will be restricted in taking action against tenants.
Landlords will be able to use all the usual legal means of dealing with tenants who owe money outside of the protected period. The Government’s Code of Practice for Commercial Property Relationships has been revised and, while it is not compulsory, provides guidance on treating rent arrears not covered by the Act.
How will the Commercial Rent (Coronavirus) Act work?
The Act provides compulsory binding arbitration and will give tenants relief in relation to protected rent.
A landlord or tenant can submit a referral to arbitration. The appointed arbitrator can then decide if there is a protected rent debt and, if so, whether the tenant should be provided relief. This could be a write off in part, further time to pay or a reduction of interest payable.
The arbitrator will consider the tenant’s business needs but also their obligations to the landlord. They will also take into account the tenant’s assets, payment history and the impact of the pandemic on their business.
The arbitration scheme is only anticipated to run until September 2022, although this may be extended.
Referrals to arbitration are supposed to be dealt with quickly, with timescales as short as 14 days to reply. An arbitrator will conduct a short hearing, of no longer than six hours, and will issue an award within 14 days. However, that award may result in a time to pay of up to 24 months. Therefore, given the potential binding nature of arbitration, landlords may simply wait out the period for arbitration to see if their tenants make a reference and then opt for a no restriction enforcement.
For advice on dealing with any issues relating to business tenancies as we come out of Covid-19 restrictions, commercial landlords or tenants should contact Abi Lutey on 01872 246230 or email@example.com