Commercial Rent Arrears - Ongoing Uncertainties and Restrictions
The Government continues to extend protections for commercial tenants and to indicate that it will introduce a new ring-fencing and arbitration scheme, but many questions remain unanswered. We take a look at what we know.
Ring-Fencing
In June 2021, the Government announced its intention to 'ring-fence' tenant debts arising due to the Coronavirus pandemic and to introduce mandatory arbitration to resolve disputes about outstanding debts. In August 2021, the Government published a policy paper which provided some further information about the proposals but leaves a number of important questions unanswered.
The policy paper makes clear that legislation will ring-fence debts accrued from March 2020 for commercial tenants, until restrictions for each tenant's sector are removed. Where landlords and tenants cannot agree on a repayment plan or waiver of ring-fenced arrears, the parties will be required to submit to binding arbitration, to decide how much the tenant should pay. The Government has made clear that landlords will be expected to share the financial burden with tenants, but that tenants who can pay, should pay.
Landlords will be able to use the normal remedies available to them, for any debts which do not fall within the ring-fencing scheme.
However, despite the time that has passed since the policy was announced, details are limited. A number of important questions about the scheme remain outstanding. For example:
- It is not clear whether ring-fencing will apply to businesses which have been affected by Coronavirus closures but which were not required to close entirely (such as restaurants which have been able to open at reduced capacity or as takeaways).
- It is not clear whether different rules will apply to different geographical areas, following the regional tier system implemented in October 2020.
- It is not clear whether tenants will fall into and out of the ring-fence protection, as national rules and local restrictions changed over the course of the pandemic.
- The Government has yet to explain how the arbitration process will work, the guidelines which the arbitrators will be expected to follow, or how the arbitrators will be appointed.
- The Government has not explained what will happen to claims for ring-fenced debts which may have begun before the ring-fencing legislation comes into force.
This all creates significant uncertainty for landlords and tenants who are still discussing pandemic debts. Counterintuitively, this uncertainty may in fact discourage parties from reaching agreement, as they await legislation which may be more favourable than the terms of any settlement.
In the recent case of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd [2021] EWHC 2591, concerning tenant arrears, the tenant applied to adjourn a hearing of the case pending the introduction of the scheme. That application was refused.
Other Restrictions
In the meantime, other protections for commercial tenants remain in place. These include:
- The moratorium on forfeiture of commercial tenancies for non-payment of rents, remains in place until 25 March 2022.
- Landlords cannot use the Commercial Rent Arrears Recovery process (formerly known as distress) to seize tenant goods, unless the arrears amount to at least 554 days' rent.
- Landlords cannot bring petitions to wind up tenant debtor companies until 31 March 2022, unless the landlord can show that the debt was unrelated to the pandemic, is for at least £10,000, and that the landlord has attempted to negotiate repayment of the debt (this follows the introduction of the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 (SI 2021/1029)).
Debt Claims
At least until the ring-fencing scheme is introduced, a landlord's main remedy remains a claim in the County Court or the High Court, for payment of rent arrear debts.
There have been a number of spirited but ultimately unsuccessful defences to such claims, as can be seen in cases such as Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] EWHC 1013, Commerz Real Investmentgesellschaft v TFS Stored Ltd [2021] EWHC 863, and London Trocadero (2015) LLP v Picturehouse Cinemas Ltd [2021] EWHC 2591.
Whether or not landlords generally have the appetite to pursue rent arrear claims remains to be seen. In many instances, the cost and delay may make it an unattractive option, and landlords may instead choose to wait for the arbitration scheme or for restrictions on other remedies to lapse.