This article provides a useful overview to both landlords and tenants who have been affected by the restrictions imposed during the lockdown period between March 2020 and July 2021 to resolve commercial rent arrears through a binding Arbitration procedure.
The article provides a brief overview of the Commercial Rent (Coronavirus) Act 2022 (‘CRCA’)that received Royal Assent and came into force on 24th March 2022.
Following the Covid 19 pandemic a number of regulatory changes were introduced by the UK government to assist commercial landlords and tenants with the commercial implications of the pandemic.
Our earlier articles (here and here) provide further information on the restrictions imposed on landlords to recover commercial rent arrears imposed by section 82 of the Coronavirus Act 2020 and came to an end in England on 25th March 2022 (24th September 2022 in Wales).
In June 2020 the UK government introduced a Code of Practice for Commercial Property relationships which was further updated in November 2021 and then withdrawn in April 2022 with the Commercial Rent Code of Practice clarifying what is statutory for parties in the scope of the CRCA.
Why Was the Act Introduced?
The introduction of an arbitration procedure for landlords and tenants provides a procedure to resolve rent debts under business tenancies adversely affected by Coronavirus. The Act provides relief from payment of protracted rent debts due from the tenant to the landlord.
The British Property Federation (BPF) estimated that by 30th June 2021, £7.5 billion of commercial rent would be in arrears. Remit Consulting estimated that by 30th March £5.3 billion of commercial rents arising since March 2020 were unpaid of which half (£2.8 billion) were in the retail sector.
With turnover not yet fully recovered, especially in vulnerable sectors such as hospitality, rent collection remains a contentious issue. Although reports indicate rent collection increased in September, previous quarter dates remained lower than normal.
In a recent report research reveals that over 63% of rents were collected on March 2022 quarter day, however rent collection from tenants is still below pre-pandemic levels despite the lifting of the moratorium on evictions.
An Overview of the Act
The Act provides relief for tenants who are struggling to pay arrears from the effects of the pandemic. The Act ringfences rent debt by businesses who were forced to close during the pandemic.
This Act assists when tenants and landlords failing to reach an agreement of mutual interests on the payment of rent accrued when the tenant’s business closed during Covid-19 to help them get some sort of relief in terms of finances.
The Act defines a new arbitration procedure for rent arrears “protected rent debt”. The amount of rent payable by the tenant will be determined by an arbitrator, forfeiture is prohibited.
What rents are covered under the Act?
Under the Act, rent includes;
Insurance costs (including loss of rent insurance)
Any interest payable on the amounts
Amounts owed for the use of the premises, whether or not they are described as rent
What arrears are covered?
The tenant must show they have been adversely affected by coronavirus which means being subject to a closure imposed by the government and forcing the business to either partially close or cease trading between 21st March 2020 and 19th July 2021 in England, and
The arrears must have been incurred from 21 March 2020, any arrears before this date or after 18 July 2021 do not apply to businesses that were not ordered by the government to close.
The Act provides:
A statutory Arbitration procedure to resolve disputes relating to the ability of the tenants to pay the rent due.
A moratorium in order to stop landlords from using enforcement remedies to regain a protected rent debt. They are not allowed to take any enforcement action for a limited period of “six months”.
Which Tenancies fall Under the Act?
The Act will apply to premises held by a tenant to operate the business being tenancies contracted out of the security of tenure provisions in sections 24 to 28 of Part 2 of the Landlord and Tenant Act 1954.
Nevertheless, for the arbitration procedure to progress, there must not be a contract between the tenant and landlord concerning the payment of the arrears.
What Are the Terms for Arrears to Amount to “Protected Rent”?
Two conditions are crucial for arrears to amount to “protected rent” including:
Firstly, the tenant’s business must have been forced to cease trading due to the Coronavirus legal restrictions or closure requirements. In addition, if a tenant was forced to close any space of their premises like the sitting area in a café, they will still fall under the scope and can benefit from this Act. Nevertheless, companies like pharmacies that never were forced to legal closure requirements during a pandemic by the state shall not fall under the Act.
Secondly, the arrears should have incurred in a certain period, the “protected period”. In the UK, it refers to the period between 21 March 2020 and 18 July 2021 during which a part of the business premises or the whole business was forced to coronavirus restrictions like closure.
Effects on Landlords’ Remedies
A moratorium to prevent landlords from using their remedies has also been introduced. This includes restrictions on:
Issuing debt claims
Enforcing money judgments
Appropriating rent payments
Conventional Arbitrations, and
Tenant restructuring procedures
The Landlord limitations apply until the last day the matter could be referred to arbitration are:
Cannot issue court proceedings.
Not allowed drawn down on a rent deposit.
Not allowed to present a bankruptcy petition.
Cannot use the Commercial Rent Arrears Recovery scheme.
The arbitration procedure provides a process for referring relevant matters to an arbitrator for issues arising during the coronavirus restrictive period on the basis parties have not come to an agreement by direct negotiation or mediaton.
The arbitration procedure under the CRCA is restricted to commercial rent arrears that arose within the Coronavirus closure period by the State.
A referral must be made within six months of the Act being passed (subject to extension). The arbitrator must make an award as soon as reasonably practicable and within 14 days of the oral hearing. Parties have a period of 6 months from the date of the Act to apply for arbitration.
In addition, when reviewing viability, the Arbitrator will review;
Liabilities and assets.
Overdue invoices, tax demands and more.
The tenant’s business performance since March 2020.
The effect of Covid-19 on the tenant’s business.
Former rental payments – from the tenant to the landlord, made under the business tenancy.
The key principals of the arbitration process are that any award should be aimed at preserving or restoring the tenant’s business if viable, so far as being consistent in preserving the landlord’s solvency. Furthermore, tenants should also be able to meet their obligations with regard to the payment of protected rent in full and without delay.
The CRCA Act makes provision for landlords and tenants who are unable to reach an agreement following the COVID 19 pandemic to refer rent arrears issues to an Arbitrator for a binding legal award.
The Act defines rent widely to include those within the definition of “protected rent debts” There is a timeline to refer issues to an Arbitrator within six months of the Act being passed, this is subject to extension. The Arbitrator must make an award as soon as practicable and if the parties opt for oral hearings to provide an award within 14 days of the oral hearing, this is subject to possible extensions.
The Arbitrator can grant reliefs to include writing off the whole or any part of the debt and give time to pay the arrears by installments and reduce any interest due on the debt.
The Act is accompanied by a revised Code of Practice for Commercial Property Relationships following the COVID pandemic. If you need any further assistance or advice then contact Avinder Laroya for a consultation.