Following the government’s call for evidence in May this year, the government released the responses and analysis on 4 August 2021, along with an accompanying policy statement. These highlight the starkly differing views of landlords and tenants and provide background to the government’s announcement in June that the moratorium on forfeiture will continue until March 2022. All of this, it should be noted, is against a backdrop of a further extension to restrictions on the use of winding up petitions in the commercial arena. Please see Related Materials.
In our previous article, we discussed the government’s call for evidence and the options it was considering in response to the commercial rent arrears that have built up as a result of the pandemic. Those options ranged from letting the current measures, principally the forfeiture moratorium, simply expire to subjecting parties to binding adjudication.
The responses are hardly surprising. The majority of tenants preferred binding adjudication (which landlords least preferred) and the removal of restrictions altogether was most favoured by landlords but least favoured by tenants. Despite this clear “dichotomy” in responses, the government nonetheless chose to proceed with binding arbitration, much to many landlords’ frustration.
The headline points from the report are as follows:
- There were significantly more tenants than landlords (306 to 133) that responded to the consultation, which together represented over 86% of all respondents.
- “A significant group of tenants” claimed to have experienced landlords refusing to negotiate; however, the exact amount of respondents that said so is not stated.
- The report identified that the most common outcomes of negotiations were rent deferrals, rent waivers and a re-gear for the remainder of the term.
- Still, most tenants (54.9%) said they were unable to agree concessions, allegedly due to landlords’ unwillingness to negotiate.
- 46.7% of tenants who responded said they would not be able to repay arrears (though 22.2% said that they would).
- 39.2% of respondents thought that the forfeiture moratorium did not encourage negotiations, with many referring to the voluntary nature of the parties’ participation in negotiations.
- 61% of respondents did not think the code of practice was effective, again referring to the voluntary nature of the code.
The government is clearly concerned about the raft of potential insolvencies (and subsequent job losses) that may result if restrictions are simply left to expire. Binding adjudication, according to the report, had the least risk of tenant insolvencies, which perhaps explains the government’s decision. It is apparent that the government feels responsible for providing a solution to the level of arrears that have built up, and a sharp return to “normality” would not be suitable.
The general consensus from the report was that legal backing was needed in order to bring parties to the table to properly negotiate. Some landlords may feel there is no room for negotiation: tenants have taken on a contractual lease of premises which is not conditional upon the tenant trading or trading well. Tenants consistently place landlords at the bottom of their list, with trade creditors often being paid in full as a priority. There is also no suggestion that landlords will receive a share in the upside of the tenant’s business, despite being forced to submit to binding arbitration and having to cut rent rightly due.
The government suggests that binding arbitration should be a “last resort” and only used after the parties have attempted to negotiate in line with a revised code of practice. However, given the relative lack of engagement under the current code, commercial landlords and tenants may not be convinced that this will be the case. Attempts to negotiate will be profoundly difficult to assess in practice. Do negotiations have to be genuine attempts to settle? Will the parties be refused arbitration if they have not tried hard enough to negotiate?
Landlords and tenants may also be of the view that if there was a deal to be done, it would have been done already. Of course it does suggest that any tenants that have buried their heads in the sand for the past 18 months will now need to at least show willingness to engage.
The government’s legislative plans remain unclear and commercial landlords and tenants are left with a number of further unanswered questions. For example, what constitutes lifting of the trading restrictions for the purposes of working out which arrears are “ring-fenced” and subject to arbitration if not agreed? What about tenants that have chosen, perhaps for commercial reasons, to remain closed? Will the legislation unravel any concessionary deals that have already been reached, including if the tenant insists that it still cannot pay? Will tenants that have already paid in full be entitled to refunds? Will the legislation be restricted to rent or will it include, for example, service charges?
The government has said that the ringfencing will only apply to tenants that have been “impacted” or “affected” by COVID-19 “business closures” for the period from March 2020 until restrictions for their sector were removed. Commercial landlords can take some comfort from the fact that this at least suggests that rent will not be ringfenced where it relates to periods where tenants elected to close during the pandemic.
Landlords’ frustrations do not end here. Despite the government’s assurances that the restrictions against issuing winding up petitions would only be extended to 30 September 2021, it has now also announced that these measures, in respect of commercial rent only, will continue until 31 March 2022. See our article on this in Related Materials for further details.
Tensions between landlords and tenants over built up arrears are, therefore, set to continue and parties will have to await further details as the legislation is published before at least some of their questions are answered.