Information on The Key Issues

A Bill addressing the issue of commercial rent arrears (built up during the pandemic when businesses were forced to close) has been published.

The Bill (expected to come into force in England and Wales from 25 March 2022), introduces a binding arbitration procedure for landlords and tenants who cannot reach an agreement on how to deal with the rent arrears.

Commercial landlords should be aware of the proposals as these are likely to impact negotiations with a tenant and what enforcement action a landlord may consider going forwards.

The Arbitration Procedure

1. There will be a six-month window where either party can refer the matter to arbitration.

2. The arbitrator will consider proposals put forward by the parties and make a binding award which may:

• Write off the whole or part of the debt;

• Give the tenant time to pay (up to a period of 24 months from the date of the award);

• Allow the tenant to pay by instalments; and/or

• Reduce (or write off) the interest which has accrued.

3. The arbitrator may dismiss the referral if the tenant’s business is not viable (or would not be viable even if an award were made), or the debt in question is not a ‘protected rent debt’.

4. In making the award, an arbitrator is required to follow certain principles and may consider certain factors which are set out in further detail in the new Code of Practice (which is discussed below).

Protected Rent Debts

1. A matter can only be referred to arbitration if it relates to a ‘protected rent debt’, (where debts arose from periods of enforced closure during the pandemic).

2. The period of closure starts from 21 March 2020 and ends on the earlier of:

a. 18 July 2021 (England) and 07 August 2021 (Wales); or

b. The last day on which the relevant business was subject to restrictions (these are set out in the new Code of Practice). Periods in between where businesses were allowed to trade are to be included.

3. Principal rent, interest, service charge and VAT can be protected rent debts.

Temporary Moratorium

There will be a temporary moratorium, which means landlords will not be able to:

1. Forfeit the lease;

2. Exercise Commercial Rent Arrears Recovery (CRAR);

3. Serve a winding-up petition;

4. Serve a bankruptcy petition;

5. Issue debt claims; and/or

6. Draw-down on the tenant’s deposit,

in relation to protected rent debts until an award has been made by the arbitrator, or until the six-month window has passed and no arbitration has been sought.

A key point to note is once the Bill becomes law, if a debt claim had been made for protected rent debts on or after 10 November 2021, either party can request that the claim be stayed. If a judgment had been made (for protected rent debts) on or after 10 November 2021, it will not be enforced.

New Code of Practice for commercial property relationships following the COVID-19 pandemic

A new code of practice (which replaces the current code) now applies to negotiations between landlords and tenants dealing with rental arrears. The code also sets out a framework for the arbitration process and how this will work once the Bill becomes law. The code is not binding, but the parties should follow it.

This newsletter is a high-level summary and only covers the key issues. A link to the code can be found here. The Bill can be found here.

We will continue to monitor the progress of the Bill through Parliament and will send further updates as and when necessary.