Update On Recovery Of Commercial Rent Arrears
Mandatory closures during the pandemic hit some commercial tenants very hard, meaning that they were unable to pay their rent because their income streams dried up. To protect those tenants, the government imposed temporary restrictions on the ability of commercial landlords to take action against defaulting tenants.
Those restrictions – which had prevented landlords from using their usual self-help routes of treating the lease as having been forfeited, or instructing bailiffs to use the Commercial Rent Arrears Recovery (CRAR) mechanism to seize goods to sell to pay the arrears – came to an end in England on 25th March 2022 (in Wales, they remain in force until 22 September 2022). Landlords are now free to use those self-help methods once again.
However, there are still important limitations on landlords’ ability to recover rent arrears that built up during the period of the pandemic. In our latest article, Mark Turner takes a look in more detail.
The Commercial Rent (Coronavirus) Act 2022
The Commercial Rent (Coronavirus) Act 2022 received Royal Assent and came into force on 24 March 2022. The Act ring fences certain rent arrears (which are known as “protected rent debts”) and imposes a new moratorium which prevents enforcement action by landlords where their tenants’ businesses were subjected to legally enforceable Covid-related closures.
In other words, landlords are free to use the traditional self-help remedies in relation to rent arrears which pre-date or post-date the mandatory closure periods, but not in relation to “protected rent debts” which accrued during the period of the closures.
The Act also makes provision for the introduction of a mandatory binding arbitration process to resolve disputes as to the ability of a tenant to pay protected rent debts.
Unpaid rent – which includes other elements such as service charge, insurance rent, VAT and interest – is regarded as a protected rent debt if the tenancy was “adversely affected by Coronavirus” and the rent is attributable to the “protected period” which applies to the tenancy.
A tenancy will be deemed to have been adversely affected by Coronavirus if the whole or part of the business carried on by the tenant at or from the premises comprised in the tenancy, or the whole or part of the premises, was subject to a closure requirement during the period beginning on 21 March 2020 and ending on the earlier of:
(a) the last day the business or premises were required to close or were subject to regulation as to how the business was run or the way the premises were used; and
(b) in England, 18 July 2021 and in Wales, 7 August 2021
Effect on landlords’ remedies
As mentioned above, commercial rent arrears other than protected rent debts are not protected under the Act and so are no longer subject to the previous moratorium imposed by CA 2022. Therefore, all of a landlord’s usual remedies in relation to commercial rent arrears which are not protected rent debts under the Act are now available once more (including the presentation of winding up petitions, after the restrictions on the ability to do so separately came to an end on 31st March 2022).
The moratorium imposed by the Act will prevent enforcement action being taken in relation to protected rent debts for a period of six months i.e. until after 24 September 2022) or, where the arbitration process has commenced within that six month period, until after the arbitration process has been concluded.
During this new moratorium, landlords will not be able to issue court debt proceedings, initiate CRAR, forfeit the lease, enforce any money judgments already obtained in respect of protected rent debts or take any other step to pursue a claim arising from non-payment of commercial rent.
Where the landlord and tenant have not been able to reach agreement as to the payment of protected rent debts, the Act provides that either party may serve notice on the other of their intention to make a referral to arbitration.
The notification should include a proposal for settlement of the arrears with supporting evidence. The responding party will then have 14 days within which to respond, either by accepting the proposal or by making a counter-proposal, again with evidence of their own in support. If the parties still cannot reach agreement, they have the option to request a hearing.
The arbitration will determine disputes based on the ability of the tenant to pay protected rent debts. The arbitrator’s decision should take into account the general principles that any award should be aimed at preserving or restoring the viability of the tenant’s business, so far as that is consistent with preserving the landlord’s solvency; and that the tenant should be required to meet their obligations to the landlord, insofar as this is consistent with preserving the commercial viability of the tenant’s business.
The arbitrator should assess the assets and liabilities of the tenant, the previous pre-pandemic rent payment history, the impact that the pandemic had on the tenant’s business, and any other information relating to the financial position of the tenant that the arbitrator considers appropriate.
The arbitrator is given wide discretion by the Act. S/he can order a full or partial write-off, the deferral of payment of the protected rent debt for a period up to 24 months, or no concession and full payment to the landlord.
The party who makes the referral to arbitration must pay the arbitrator’s fees in the first instance, before it takes place. However, the default costs order on conclusion of the arbitration will be that fees should be split equally between the parties unless, in the arbitrator’s view, a party has behaved unreasonably. In those circumstances, the arbitrator has a discretion as to how to apportion costs between the parties. Each party is responsible for payment of its own costs incurred in the arbitration.
How we can help
Butcher & Barlow’s experienced litigation team can assist both landlords and tenants with disputes relating to non-payment of commercial rent. We can help you pursue or defend a claim, try to reach a negotiated settlement with the other party, or deal with arbitration under the new mechanism introduced by the Act.
If you would like advice on pursuing or defending a commercial rent arrears claim, please get in touch with either Mark Turner or Alex Sandland on 01606 334309 or by email at email@example.com or firstname.lastname@example.org.