New Code for Commercial Lockdown Rent Arrears

Whilst many businesses are now back to trading at levels enjoyed before the March 2020 lockdown, the effect of the pandemic is still being felt by many commercial landlords and tenants. Forced business closures and restrictions on opening have left tenants struggling to pay the rental arrears that accrued during the lockdowns.

Seeking to preserve otherwise viable businesses and save millions of jobs, the government has published a new Commercial rents code of practice, November 2021(‘the Code’). The purpose of the Code is to provide landlords and tenants with a suggested framework within which to resolve lockdown arrears, before a compulsory arbitration process comes into force on the passing of the proposed Commercial Rents (Coronavirus) Bill (the “Bill”).

The Code

The Code, which was published on 9 November 2021, replaces the previous code of practice which was designed to encourage landlords and tenants to work together. The new Code sets out principles and promotes good practice for parties to follow to reach a negotiated agreement for commercial rent debts accrued as a result of the pandemic. It is likely that a failure to comply with the Code will impact a landlord or tenant’s ability to obtain their best outcomes in the event their lockdown arrears disputes become subject to the proposed arbitration process.

The government is encouraging landlords to attempt to reach a negotiated agreement as opposed to pursing a County Court Judgment on the debt. Retrospective provisions which will come into force when the Bill is passed will force the Courts to stay any debt proceedings relating to pandemic rent arrears which were brought on or after 10 November 2021, and will prevent landlords from taking enforcement action on any judgments obtained since that date.

The Commercial Rents (Coronavirus) Bill

The Code also seeks to explain the scope and content of the forthcoming Bill which the government is aiming to have passed by 25 March 2022. The Bill will to create a streamlined binding arbitration process which is intended to bring about speedy out-of-Court conclusions to cases concerning lockdown arrears.

When does the Code apply?

The Code applies to tenants with viable businesses who have accrued commercial rent debts (including service charges and insurance) during a ring-fenced period. The tenant’s business must have been forced to close or cease trading as a result of the pandemic. The terminology appears to operate as follows:

Ring-fenced Period: This runs from 21 March 2020, when business closures first came into force, to the date when specific restrictions were last removed for that relevant business sector. The Code recites the periods of mandated closures, however, it emphasises that the ring-fenced period should be considered on a business-by-business basis, as some tenants may not neatly fit into these sectors. It will be interesting to see the approach taken to businesses whose offering traverses multiple sectors and who were able to partially reopen during some of the restrictions.
Viable Business: To fit within the scope of the Code, the tenant’s business must have otherwise been viable. To determine this, the parties should set aside the ring-fenced rent, and consider whether the business has or will in the foreseeable future, have the means and ability to meet its obligations and continue trading.

Negotiation under the Code

Tenants remain liable for payment of rent under their leases and the expectation is that tenants who are able to pay their rent arrears in full, should do so. However, where tenants are unable to do so, a negotiated agreement as to the rent arrears should be reached. Any existing agreement reached before the Code was published should be honoured and will not be affected by the new arbitration scheme.

It is worth noting that in circumstances where the commercial rent debt is outside the scope of the Code, parties are still encouraged to follow the principles set out in the Code to reach a negotiated agreement and the Code sets out what it refers to as ‘Principles of Negotiation’ to assist parties in this regard. Briefly, they encourage the parties to provide information to one another as follows:

The landlord will need to consider the tenant’s viability and the affordability of any sums owing.
Tenants will be required to show their landlord sufficient evidence of their need for assistance with rent. This will include demonstrating why the rent payments are unaffordable and what payments might be affordable in the near future. Examples of such include evidence of unpaid or overdue invoices or tax demands, money judgements, loss or insolvency of major customers.
These factors can also be used to assess the landlord’s solvency and the landlord can state the impact that writing off or reducing the rent debt will have on its own circumstances. Landlords are considered to be solvent unless they are currently, or are likely to become, unable to pay their debts as they become due.
The Code sets out that the parties should behave in a transparent, unified way, acting reasonably and in good faith in order to reach a swift resolution. Where an agreement has been reached, it is recommended that this is put in writing.
Where parties are unable to reach an agreement themselves, they should consider a third-party mediator. Where an agreement is not able to be reached at all by negotiation, they may apply for binding arbitration under the Bill.

Binding arbitration process under the Bill

The binding arbitration process is to be used in instances where the parties are unable to come to an agreement by themselves. Parties will be given 6 months from the date the Bill comes into force to apply for the process.

Where a tenant cannot afford to pay their arrears in full, the arbitrator must consider issues of affordability and take into account what the tenant can afford whilst ensuring the landlord’s solvency is preserved.

The binding arbitration process introduced by the Bill will have several stages, starting with a letter of negotiation and pre-action negotiation, following by an application for arbitration, final offers and a hearing. The decision of the arbitrator will be legally binding, with limited grounds for appeal. It appears that where the tenant would be viable but for the ring-fenced debt and any repayments are unaffordable, the arbitration process may enable the arbitrator to order that portions of the debt are written off completely, but the Bill as currently drafted also states that where possible, tenants should be ordered to meet their obligations in full and as soon as they are able to.

Effect on available remedies

The Bill will temporarily prevent certain remedies from being exercised in relation to the ring-fenced debt, until either a settlement has been reached, or until the 6 month timeframe for applying to the arbitration system has passed. The Bill will prevent landlords from issuing debt proceedings whilst arbitration is available or ongoing and will also prevent the enforcement of any judgments obtained in relation to ring-fenced debts between 10 November 2021 and the end of the window for arbitration. Similar restrictions apply to CRAR and insolvency processes, forcing parties to consider arbitration ahead of other remedies.

It is worth noting that tenants are still protected from eviction for commercial rent arrears until 25 March 2022.

Comment

Jamie Kidd, partner specialising in Property Litigation comments:

“Certainty is needed in relation to how lockdown arrears are to be managed and the new Code and proposed legislation are a step towards this. Further detail will be needed about how the arbitrators will operate but in broad terms this appears to be a step in the right direction.”

For more information, please contact a member of our Property Dispute Resolution team here.

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