On 16 June 2021, the government announced that the current restrictions on landlord’s enforcement options, primarily forfeiture and Commercial Rent Arrears Recovery (CRAR), for commercial rent arrears would be extended by a further nine months until 25 March 2022.
In what is a more eye-opening development, the government also announced that they will soon introduce, through legislation, a new binding arbitration process for landlords and tenants who have not been able to agree concessions or payment plans. Commercial rent disputes specialist Chris Hill provides an overview of the government’s latest announcement and what this means for both landlords and tenants.
A nine-month extension of current restrictions on forfeiture and CRAR
It is now well known that on 25 March 2020, the government restricted the right for landlords to forfeit leases for non-payment of rent (but not other breaches) and prevented the use of CRAR. These were initial emergency measures which coincided with the implementation of the first national lockdown. The landscape at that moment in time was unquestionably highly uncertain.
The measures were initially introduced for a period of three months (until 30 June 2020). Since then, the government has extended these restrictions a further four times at three-monthly intervals with the latest restriction due to end on 30 June 2021. The new extension is now, staggeringly, for a further nine months.
Although the government announcement explained that this was to enable “the sectors who have been unable to open” to have enough time to come to an agreement with their landlords, the restrictions apply to all premises, whether affected or not and whether forced to shut or not. With the previous extensions, some sort of extension here was anticipated, if not the length of it.
There will be a great many cases where this extension might be viewed as fair and essential to allow otherwise sustainable businesses time to trade out of difficulty and perhaps pay what rent they can. However, it is also apparent that there are other cases where these circumstances do not apply, and tenants are not paying all or any rent where they can (arguably) afford to pay all or at least some of the rent. Landlords will be prevented from taking any recovery action now for a further nine months (and a period of two years in total). Landlords in those situations are entitled to feel dismayed by this development.
A radical new binding rent arrears arbitration process
Whilst some form of extension to the current moratoriums was widely expected by the time of the announcement, the introduction of a new rent arrears arbitration process was much less so.
Post-March 2020, there was initially a great deal of debate about whether rents were lawfully due under leases considering COVID and/or suggestions that the government would introduce legislation to provide that some or all of the rent was not due (or even pay rents on behalf of businesses). That debate appeared to have been dealt with by two High Court cases through which, in simple terms, the Court confirmed that rent remained due notwithstanding COVID and all the attendant difficulties that presented.
As we now appear to be ever closer to getting back to normal, it is somewhat of a surprise that the government will now introduce a binding arbitration scheme, which is to be used to resolve arrears discussions where parties have been unable to agree.
The preliminary details of the scheme include:
- Arrears which fell “when a business has had to remain closed during the pandemic” will be “ring-fenced”.
- The announcement suggests that future rent should be prioritised and paid, whilst discussion and agreement concerning historic arrears will dealt with separately.
- The arbitrators will be screened to ensure that they are neutral.
- The measures are being brought in to “guide landlords and tenants to agree payment plans” and landlords are “expected to make allowances” and “share the financial impact with tenants”.
- The announcement suggests this “could be done by waiving some of the total amount or agreeing a longer-term payment plan”.
- In the absence of an agreement, the arbitration process will be used which will settle these debts (i.e. only those which relate to when premises were forcibly closed) “fairly and with finality”.
There are, immediately, a great number of important unresolved questions about the scheme, how it will work and what it will cover. These questions will likely be answered in the next few months:
- Perhaps most importantly, there is the question of what actually is there to arbitrate if in fact it has been confirmed (by the courts) that the rent for these periods remains due?
- How effective with the arbitration be, absent of any new change in the law about whether rent is due, if parties have not managed to agree concessions by now? Many landlords may not have been paid any rent for well over a year.
- Is this scheme intended to force through rent concessions (by ruling that rent is not due) and if so, is that not retrospectively changing the law (which is generally impossible)?
- Will therefore the arbitration mechanism have any real teeth and if so, what are those teeth? If not, is this not simply mediation by another name?
- What will happen to those tenants who have stretched and paid rent, if they are now to find out they could have chosen not to do so?
- What will now happen to those cases where court proceedings have been issued and hearings imminent? Will these be allowed to proceed, or will they be stayed?
Although the announcement encourages tenants to pay and landlords to agree (as did the Code before now), where that has been possible, it has already happened. We are now left with a large proportion of cases where tenants are not paying, and landlords are not able or prepared to agree concessions. That is the real problem here and it is not yet clear how this scheme will give a final answer to that problem.
It is therefore critical that full details of the legislation are provided as soon as possible, and we will all need to await developments with considerable interest.
Whatever those details are, COVID-related arrears are a difficult and emotionally charged issue. Even with new measures being introduced, at this stage, it seems unlikely that there will consensus from all parties that the arrears will be dealt with “fairly and with finality” and that the government will find “the right balance between protecting landlords whilst also helping business most in need”.