With many of the interim measures and reliefs afforded by the Commercial Rent (Coronavirus) Bill coming to an end in the next couple of weeks, landlords and tenants should be looking to agree terms of concession or a payment plan. This article outlines what to consider, and what could occur where this isn't in place.
In November last year, the Government introduced the Commercial Rent (Coronavirus) Bill ("the Bill") and an updated Code of Practice (“the Code”) in an effort to address the sums due under tenancy agreements and leases that tenants struggled to pay during the periods of closure at the height of pandemic. The Bill is often talked about in the context of rent debts but it is important to remember that it is intended to cover service charge, insurance rent and interest as well, and provide commercial tenants with protection in respect of these arrears.
The form of the Bill has not changed much since the announcement and a summary as to what the Bill covers, the arbitration process proposed, and the interim protection measures afforded to tenants can be found in this article:
But, while the Bill itself hasn't changed, many of the interim measures and reliefs afforded by the Bill will be coming to an end by 31 March 2022, including the moratorium on the use of forfeiture and Commercial Rent Arrears Recovery procedure. Not only that, restrictions placed on other processes of debt enforcement which are non-specific to a landlord-tenant relationship, such as statutory demands and winding-up petitions, are also lifting. This means that commercial landlords will once again be able to utilise these procedures to pursue and enforce outstanding debts which will no doubt be a cause of concern for tenants.
So, while the Bill seeks to lay a path by which tenants and landlords can deal with the arrears arising as a result of the most trying periods of the pandemic, the end of the interim reliefs marks an end to the breathing room space previously available to commercial tenants.
Concurrently, for commercial landlords with tenants in arrears, it is an important time to assess what amount of those arrears will be deemed 'protected debts' under the Bill, and therefore what amounts will fall outside the scope of the Bill, in determining how best to pursue the amounts owing by a tenant.
In respect of protected debts, these will be within the remit of the new arbitration scheme.
Landlords and tenants will have six months from the date the Bill is passed to bring the matter to the arbitration scheme but will first have to give notice to the other party, with a proposal for payment, of their intent to refer the matter in order to give the parties the opportunity to resolve the matter between them. The proposal will be supplemented by a financial pack.
If a solution cannot be reached by the parties, the arbitrator will then consider the proposals of both parties and decide what concession should be made based on the evidence available. Landlords and tenants will to be able to prove their financial situation and the Code provides a non-exhaustive list factors at Annex B to be taken into account when the parties, and the arbitrator, consider the viability of any concession proposal. Parties should look to Annex B when marshalling their proposals and consider: firstly, what evidence is relevant to their proposal and, secondly, whether there is sufficient evidence to support their proposal (or if there is evidence to undermine it).
Participation in the arbitration scheme will require transparency from both parties on their position and an award by the arbitrator will seek to balance the viability of the tenant's business against the solvency of the landlord. The decision of the Arbitrator (and any hearing, if listed) will be public so there is a risk of sensitive financial information will be publicly available.
We strongly urge tenants who wish to engage in the arbitration process to make proposals to landlords now by sharing financial information with them, as this is the sort of information the arbitration process will focus on if instigated. This may have the potential to avoid the matter being referred to arbitration.
Unprotected rents are those arrears that relate to periods when there were no closure mandates in force. There are no restrictions on landlords issuing debt claims for these amounts and they fall outside the remit of the arbitration scheme.
Until the end of March 2022, landlords will be restricted from enforcing judgments obtained through debt proceedings.
Enforcement: What to expect from the end of March 2022?
Put simply, a statutory demand is a formal demand for a debt. They can be made by anybody to whom money is owed. The statutory demand is often a creditor’s first step to enforcing the debt owing to them and are an effective way to rachet up the pressure on a debtor to either come to the table with either payment or a proposal to settle the debt. This is because statutory demands provide a tight timetable for response (21 days) after which time the person that sent the demand can use the debtor's failure to respond as a basis for which to commence winding up or bankruptcy proceedings.
It is imperative that tenants do not ignore a statutory demand if one is received. It is critical to respond within the prescribed timetable, even if payment of the full amount of the demand is not possible, to avoid the creditor using the unanswered statutory demand as evidence of illiquidity and instituting insolvency proceedings.
Winding Up Petitions
Until 31 March 2022, landlords will be unable to bring winding-up proceedings in respect of any sums owing under a "relevant business tenancy" which includes rent, service charge and other payments payable in respect of a tenancy where the premises are occupied by the tenant or another lawful occupier (either a sub-tenant or under a licence).
Provided the government does not extend this restriction, landlords will soon be able to utilise this insolvency procedure to once again pursue a tenant for unpaid arrears.
However, the instigation of winding-up proceedings is rarely the most effective way to recover sums owing to a landlord as they often fall within the group of unsecured creditors who are paid last upon the winding up of a company. As such, most landlords will likely not want to take this route in respect of outstanding debts.
There is also a risk that this gives rise to potential claims against the landlord in respect of an abuse of process on the basis that the landlord has no genuine intention to wind up the company and further, because it is not in the best interest of other creditors to wind up the company. It is expected that landlords will seek to threaten to wind up companies but there are challenges which can be made to object to this.
Commercial Rent Arrears Recovery ("CRAR")
The CRAR procedure is a statutory self-help remedy for landlords. If landlords of commercial properties follow the process correctly, and they must be careful to, then they can recover rent arrears by taking control of their tenant's goods and selling them.
The use of CRAR has been suspended as a procedure for commercial landlords until 25 March 2022. If there is no further extension – and there is no indication that there will be – landlords will once again be able to use this procedure from 26 March 2022.
However, there are strict requirements of the procedure for this remedy which, if not followed precisely, could expose a landlord to a potential claim from their tenant. Add to that a landlord might not want to go through a cumbersome process of acquiring and then selling the tenants goods to satisfy the debt, the procedure under CRAR is generally not the first choice for a landlord in pursuing rent debts. This may be a viable route where tenant has particularly valuable goods that the landlord will be able to sell quickly, but there is likely to be low demand for the purchase of second-hand goods.
Throughout the pandemic, landlords have been unable to forfeit leases on the basis of non-payment of rent but this protection is due to end on 31 March 2022. However, this does not mean that landlords will suddenly start seeking to re-possess their properties.
Unless there is an uptick in market demand, landlords will likely not seek to regain possession of their properties only to have them sit empty while a suitable replacement tenant is found. That being said, tenants that are in arrears should still open a dialogue with their landlords to discuss how to deal with any outstanding arrears that are not covered by the Bill to avoid their landlord utilising their forfeiture rights.
If a landlord wishes to forfeit a lease then it must not do anything which may waive the right to do so.
Time is fast running out to deal with both protected and unprotected rents. It is essential that parties agree terms of a concession or payment plan without the need to consider arbitration or any of the enforcement steps detailed above.
If arbitration is suitable for a tenant then steps should be taken now to follow an informal process akin to that provided for in the Bill. If this informal process does not prove to be fruitful then the tenant (and a landlord) can mirror this process in the formal process.
In relation to arrears which do not fall within the jurisdiction of the arbitration scheme consideration should be given as to whether there is a risk of enforcement by a statutory demand, winding up petition, CRAR or forfeiture. If there is a risk then terms of a concession should be agreed now.
Notwithstanding the guidance above, it is unlikely that a landlord will seek to wind up a company due to the cost and due to the potential low return. Forfeiture is also unlikely unless the landlord has a reason to take back control of a property. CRAR is likely to be the most used tool by a landlord as whilst it does not yield a big return for a landlord, it causes huge business disruption and usually puts the tenant under pressure to agree terms or settle arrears.
If you would like further advice on the Bill, the code or COVID commercial rent matters, then please contact Bhavini Patel on Bhavini.firstname.lastname@example.org.