Where are we on rent arrears accumulated during the pandemic?
With Covid-19 restrictions being lifted in England, both our landlord and tenant clients are asking for advice regarding arrears of rent in respect of commercial leases which have accumulated over the last two years, writes Gardner Leader partner Greg Humphreys.
The Coronavirus Act 2020 introduced significant restrictions on a landlord’s ability to recover arrears of rent which accrued during the pandemic.
Whilst initially only intended to last for a few months, those restrictions have been repeatedly extended until they came to an end on March 25, 2022.
The question is now how will arrears which accrued whilst the restrictions were in place be treated and what happens to “new” arrears which accrue after March 25, 2022?
What happens now?
Arrears which accrued and were payable by businesses which were subject to forced closure during the pandemic will be ring-fenced in respect of the period from March 21, 2020, to July 18, 2021, or a shorter a period to the extent that the relevant business was not closed for the entirety of this period. The moratorium will only apply whilst the business was forced to close.
What will be the effect of these arrears?
The effect of the ring-fenced arrears is that those cannot be recovered by resorting to commercial recovery of arrear rent (CRAR) and the issue of winding up proceedings and this cannot be a reason for a landlord to forfeit a lease.
Instead the parties will have to submit to a binding arbitration process which will seek to resolve the question of the arrears.
Both parties will have an opportunity to present a case to the arbitrator and each party will make an offer to settle the arrears.
Part of the arbitrator’s jurisdiction includes determining whether or not the tenant should be given relief from payment of all or part of the debt which is outstanding or to make an order for payment of the protected debt in instalments.
A key to point to bear in mind is that this arbitration process must be initiated by either party by no later than September 24, 2022, to require the parties to deal with the dispute via the arbitration process.
The significance of this date is that other proceedings that landlords may have initiated outside of the arbitration process will be suspended until September 24, 2022.
After that date, those proceedings will no longer be suspended and landlords can continue with their usual enforcement process in respect of the arrears which were ring-fenced.
As landlords are not obliged to refer to refer the matter to arbitration prior to the September deadline, they may decide to simply wait until that period has expired and the moratorium is lifted and then take steps for recovery of the rent in the usual way from any moratorium.
On the other hand, it may well be in the interest of the tenant to bring the matter of the arrears to a head whilst the binding arbitration process is in place so that it may force the landlord to submit to the seek to use the arbitration process.
What happens to arrears outside of the ring-fenced period?
In relation to arrears which are not ring-fenced in terms of this moratorium, landlords are free to enforce their rights to recover any such arrears.
The key point to note for landlords in this regard is the risk that they will be regarded as waiving the right to forfeit the tenant’s lease if they simply treat the lease as continuing.
This includes continuing to demand rent or taking steps which are consistent with the lease remaining in place, such as serving notices.
This may be a particularly difficult area to manage if arrears accrue which are both protected, and therefore subject to the arbitration process, and arrears which are not protected, and in respect of which the right to forfeit the lease due to non-payment of the rent exists.
If the landlord receives a payment from the tenant of arrear rent, this must be allocated towards payment of the non-protected rent so that the maximum amount of protected rent remains subject to the protections.
How does this effect landlords?
So from a landlord’s perspective, it will be important to consider the financial viability of your tenant in the longer term and whether it is worth your while waiting until the expiry of the binding arbitration period in September to take the usual steps to recover arrears or whether it would be better to activate the arbitration process now and get a deal agreed with the tenant.
If landlords forfeit the lease then they will run the risk that the property may sit vacant and the landlord would then have the liability for payment of business rates.
From a tenant’s perspective, as the arbitration process has a limited lifespan, those with protected arrears should seriously consider availing themselves of the arbitration process with a view to using this to reducing their liability for the full amount of the arrears.
If a tenant is genuinely unable to make payment of the full amount of the arrears and can prove this to the arbitrator then this will be considered by the arbitrator in making their award.
How can Gardner Leader help?
If you are a landlord looking to understand more about whether you are entitled to the arrears, or you are a tenant wanting to learn more, please contact our real estate team, and they will be able to offer advice and peace of mind on your situation.