The impact of the pandemic has devastated commercial sectors following mandated government closures. Landlords and tenants alike have suffered. Research by property specialists Remit Consulting revealed that the estimated rent shortfall to landlords was in the region of £6.4bn between March 2020 and the June 2021 quarter in England alone.
The UK Government was to announce further measures to help parties deal with the arrears of commercial rents accrued due to the pandemic. Well, that announcement came in November 2021 and a new Code of Practice for Commercial Property (the “Code”) was introduced. Pending the introduction of the new arbitration process due to come into force on or around the 25 March 2022 (see below) the new Code provides parties with a clear process for settling outstanding debts.
What is the Code and what does it seek to achieve?
- It is important to remember the legal position remains, a tenant is liable under the covenants of its lease. The Code is meant as a “best practice guide” to assist in negotiations to enable viable businesses to survive and applies to all commercial leases where businesses have accrued commercial rent debts since March 2020.
- Tenants unable to pay in full should negotiate with their landlord in the expectation that the landlord waives some or all rent arrears where they are able to do so.
- However, where it is affordable, a tenant should aim to meet their obligations under their lease in full. Any relief given by a landlord should be no greater than necessary.
- The preservation of the tenant business viability should not come at the expense of the landlord’s solvency – however tenants should not have to take on more debt or restructure their business in order to pay their rent. A balance needs to be achieved.
- Where a landlord and tenant are unable to reach agreement by negotiation, they may be able to apply for the proposed new binding arbitration process (see below).
What’s new for 2022?
The Code is voluntary, no landlord or tenant will be forced to comply. So the Government presented the Commercial rent (Coronavirus) Bill which is expected to become law on or before the 25 March 2022. This will introduce a system of binding arbitration building upon the Code.
The new act will apply to rents accruing between 21 March 2020 and (likely the) 18 July 2021 and apply to business premises that were mandated to close by the Government but limited to leases that fall into Part II of the Landlord and Tenant Act 1954.
Ring-fenced debt within the scope of the process will be temporarily immune from some legal remedies sought by landlords (extending to those currently unavailable under the Coronavirus Act 2020).
The act proposes that either party may make a reference to arbitration that must include a formal proposal for resolving the matter supported by evidence. The counterparty then has 14 days to submit its own proposal. The arbitrator will have up to 14 days from a hearing, or as soon as reasonably practicable if not, to consider the evidence and come to a decision which will be legally binding.
More on the new act once it is legislated.
For further information and detail please refer to: https://www.gov.uk/government/publications/commercial-rents-code-of-practice-november-2021 and https://bills.parliament.uk/bills/3064