The government's plans
It is clear that the Government intends to support tenants with pandemic related rent arrears. Its current policy statement confirms that:
- legislation will "ringfence" arrears relating to periods of enforced closure from March 2020 until restrictions for the tenant's sector were lifted
- landlords and tenants should negotiate and agree any possible waivers or deferrals of rent arrears. However, if agreement is not possible, new legislation will introduce a process of "binding arbitration" to resolve any outstanding disputes
- a "strengthened" code of practice will be introduced by legislation which will contain the principles which both parties and the arbitrators must have regard to during negotiations and the arbitration itself
- tenants who can pay, should do so. Furthermore, tenants will no longer enjoy protections in respect of rent arrears falling due outside of the "ringfenced" period and should pay these arrears in full.
What happens now?
Whilst we await the legislation, landlords and tenants alike remain in the dark about the following key issues:
Which tenants will fall within the scope of the legislation?
- The new legislation will only apply to those tenants who have been "impacted" by COVID-19 business closures. However, there is no clarity on what will constitute impacted for these purposes.
- The pandemic has affected businesses in different ways. For example, some tenants, such as essential retailers, will have been able to legally keep their premises open. However, due to reductions in footfall as a result of the various national or local lockdowns, many of these tenants have still experienced a significant drop in revenue. Similarly, some office tenants will not have been subject to "enforced closures" in the same way as retail and hospitality tenants. However, they may have still suffered considerable detriment to their overall business as a result of the pandemic restrictions. Clarity on this point will be essential if the legislation is to work effectively.
How will the legislation determine if a tenant is "able to pay"?
- Whilst many tenants may have suffered a drop in revenue throughout the pandemic, those who are highly capitalised are arguably still able to settle any outstanding arrears. Another nuance for the draftsman to consider will be if businesses who have been able to trade profitably despite closures, such as through an increase in online sales or take away services, should be able to benefit from the protections afforded by the legislation.
- Given the Government's clear preference for tenants to pay arrears where they are able to do so, it is also likely that a high degree of disclosure of financial information will be required to evidence why payment of the outstanding rent was not possible. Such information sharing may be unattractive for some businesses and will certainly be a strategic consideration for landlords and tenants alike as they navigate the new process.
Which arrears will be "ringfenced"?
- The Government has provided very little guidance on how the vital concept of "ringfencing" will be applied in practice. In particular, in circumstances where restrictions for many sectors have been eased gradually over time, it is unclear at what stage the Government considers that this ringfenced period should come to an end and how the term "restrictions" should be interpreted. For instance, for a significant period of the pandemic restaurants were permitted to host diners in outdoor arears but their indoor premises remained closed. In many cases, these continued restrictions prevented restaurant tenants from restoring revenue to pre-pandemic levels and meeting their rental obligations. Similarly, many retail and hospitality businesses have faced continued capacity restraints due to social distancing measures which have often had a detrimental impact on revenue and their ability to pay rent.
What will happen to existing proceedings?
- As one of the only recovery methods currently available to landlords, many debt claims for rent arrears have already been issued and are making their way through the courts.
- The Government has not yet confirmed how these proceedings will be dealt with. However, we consider it likely that proceedings will be automatically adjourned by the new legislation, although the cost consequences of this remain unclear.
We will be publishing further updates as and when these details are confirmed so watch this space! In the meantime, we would be interested to hear your views on the proposed new scheme. If you wish to discuss your strategy in anticipation of the new legislation, don't hesitate to get in touch with a member of our team to ensure that you are best prepared for when the new scheme comes into force.