For those affected, the Commercial Rent (Coronavirus) Act 2022 (the Act) offers a final opportunity to draw a line under these arrears.
What Debts Does the Act Protect?
The Act ring-fences certain rent debts (called 'protected debts'). For a rent debt to be protected, it must:
- be a rent, service charge or insurance rent, or interest or VAT due on them
- relate to a 'business tenancy'. This will include most charities who occupy property for their charitable activities, whether or not the property is used to generate income
- relate to a period of occupation since 21 March 2020 during which the charity was subject to Coronavirus (COVID-19) closure requirements at the property (the 'protected period'). Whether or not a debt is protected will therefore depend on the restrictions in place from time to time
- not have been subject to a settlement with the landlord already
What Does the Act Do?
The Act imposes a package of restrictions on landlords' abilities to recover protected debts and replaces them with an arbitration scheme.
The Act prohibits a landlord from starting a debt claim, seizing goods, forfeiting the lease, petitioning to wind up or bankrupt a charity, drawing down on a deposit to recover the protected debt or requiring a tenant to top-up a deposit. Landlords are also required to apply funds to clear non-protected debts first, sometimes retrospectively.
Instead, the landlord or tenant can refer a protected debt to arbitration, at any point before 23 September 2022. An arbitrator will then decide whether the tenant should pay none, some or all of the debt and over what period.
The arbitrator's award should aim to preserve or restore the viability of the tenant's operations. So far as that can be achieved, the tenant will be expected to pay as much as it can.
How Long Do These Protections Last?
If a protected debt is referred to arbitration, it remains protected until the arbitration concludes. If not, it remains protected until 23 September 2022.
What Can Your Charity Do?
If your charity is still struggling with COVID-19 rent arrears, consider the following:
- The impact of the protected debts on your viability - If protected debts threaten the viability of your charity, consider referring the matter to arbitration and asking for the debts to be reduced, written off or deferred as needed. If the position is unclear, you may want to wait until close to the deadline in September 2022 (though beware that your landlord may refer the debt to arbitration sooner).
- Speak with your landlord - Arbitration exposes landlords to considerable uncertainty. Many landlords will still be prepared to offer payment holidays or to waive portions of a protected debt (or even unprotected debts). Parties are expected to negotiate in the spirit of the principles set out in the Government's Code of Practice (7 April 2022).
- Prioritise payment of unprotected debts - Landlords can still enforce unprotected debts (for example by forfeiting your lease) so these should be your priority.
- Consider past payments - If you have paid any debts which would have been protected, consider whether these sums should have been applied (retrospectively) against unprotected debts. This may clear your unprotected debts and buy you some breathing space.
- Take legal advice - The Act is complicated both in its scope and its effect, and landlords and tenants are still getting to grips with the arbitration process.
If your charity is affected by COVID-19 rent arrears and you would like further advice on your options, please contact Philip Sheppard in our Property Litigation team on 0117 314 5621 or complete the form below.