Commercial tenants are currently protected from eviction until 25 March 2022, to provide businesses with breathing space and help protect jobs when certain industries had to close in full or in part during the pandemic. A voluntary code for commercial landlords and tenants was introduced in June 2020, encouraging landlords and tenants to negotiate and settle rent arrears where possible.
This has now been replaced by a new voluntary Code of Practice (“the Code”), which will establish a legally binding arbitration process for commercial landlords and tenants who have not already reached agreement on existing rent arrears. The Code sets out that, in the first instance, tenants unable to pay in full should negotiate with their landlord in the expectation that the landlord waives some or all rent arrears where they are able to do so and/or agrees a payment plan, limited to 2 years.
The Code applies to all commercial leases held by business tenants that have built up rent arrears (including service charges and insurance) due to an inability to pay, caused by being forced to close or cease trading as a result of the pandemic. This includes the hospitality, retail, leisure and manufacturing sectors. The arrears must have accrued during a ring-fenced period, being 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 (“Ring Fenced Debts”).
The business tenants must have a “viable” business. There is no set definition of viability and the parties are asked to consider whether the business tenant, aside from the Ring Fenced Debts, has or will in the foreseeable future have, the means and ability to meet its obligations and to continue trading. If a tenant business has not been able to pay any rent since Covid restrictions were lifted this may be evidence that the tenant business is not viable.
The Code promotes a settlement that preserves – in so far as possible – the tenant business and the jobs that it supports, without undermining the solvency of the landlord. Tenants will need to show landlords sufficient evidence to substantiate their need for assistance with rent. Landlords should also make clear to the tenants the impact of late or non-payment of rent on their own circumstances.
Evidence will vary depending on the specific circumstances but could include, existing and anticipated credit/debit balance, business performance since March 2020, overdue invoices or tax demands, exceeding overdraft limits, creditor demands, loss of important contracts, insolvency of a major customer. When considering what is affordable for either party, this should not include restructuring, borrowing, or the taking on of further debts.
Where the parties are unable to reach a settlement, The Commercial Rents (Coronavirus) Bill (“the Bill”) introduces a binding arbitration process.
Parties will be given 6 months from the date the Bill comes into force to apply for the arbitration process. It is currently anticipated that the Bill will be passed by 25 March 2022 (being the date upon which the current protection for commercial tenants expires). The fees payable for arbitration will be payable in advance and are yet to be decided. The fees are expected to be variable; with a sliding scale, relative to the size of the rental arrears owed, used to determine a fee cap and ensure it is proportionate for each case.
It is important to note that the Bill will prevent other remedies from being exercised in relation to the Ring Fenced Debts, until either a settlement has been reached or the 6 month timeframe for applying to the arbitration system has passed.
Landlords will not be able to issue debt proceedings nor enforce any judgments obtained in relation to ring-fenced debts between 10 November 2021 and the end of the 6-month window for arbitration. Landlord’s will also not be able to take any action through the Commercial Rent Arrears Recovery procedure nor commence any insolvency processes.
© 2021 GSC Solicitors LLP. All rights reserved. GSC grants permission for the browsing of this material and for the printing of one copy per person for personal reference. GSC’s written permission must be obtained for any other use of this material. This publication has been prepared only as a guide to provide readers with general information on recent legal developments. It is not formal legal advice and should not be relied on for any purpose. You should not act or refrain from acting based on the information contained in this document without obtaining specific formal advice from suitably qualified advisors.