Commercial Rent in the Pandemic

The Commercial Rents (Coronavirus) Act 2022 (the Act) has finally passed into law.

This legislation is intended to address the issue of coronavirus related commercial rent debt. Legislation had previously been introduced to protect tenants from eviction when they failed to pay rent during the period of trading restrictions imposed by the government. It was designed to avoid a potential tsunami of evictions where tenants were unable to trade and therefore pay the rent. At the same time, landlords and tenants were encouraged, via guidelines, to engage constructively to resolve what rent should be paid and when.

However, there remain a considerable number of properties where it has not been possible to agree, so this legislation has been introduced to seek to resolve that impasse.

The Act introduces an arbitration scheme to deal with the concept of "protected rent debt", which is defined as rent and certain other charges which fell due during the period in which the business tenant was subject to any government imposed corona virus related restrictions. The arbitration scheme will not deal with rent which fell due outside the period of business restrictions, leaving landlords free to pursue that debt.

The Bill which preceded the Act set out the scheme proposed by the Government and there were no significant last-minute amendments to the Act, although there was some clarity provided on liability for the costs of the arbitration process and confirmation that guarantors would be protected as well.

Draft guidance for arbitrators has also been published, with the final guidance to be confirmed shortly.

Where protected rent debt exists, the Act introduces a scheme which can be initiated by the landlord or the tenant. The arbitration must be commenced within six months of the date the Act was passed i.e. by no later than 24 September 2022. The Act sets out the process which must be followed prior to the commencement of the arbitration.

It is also important to remember that the parties are not obliged to engage in arbitration. They are still free to negotiate the terms of payment between themselves. The arbitration scheme is there to resolve the position in the event that the parties themselves cannot agree terms.

In order to qualify for the arbitration scheme the tenancy must be a business tenancy within the meaning of part II of the Landlord and Tenant Act 1954. Such tenancies include any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by them or for those and other purposes.

Prior to accepting the referral, the arbitrator must satisfy themselves that the rent in question is protected rent debt. For different businesses, this will cover different periods of time. For instance, retail businesses were subject to restrictions for a shorter period than pubs and restaurants.

The arbitrator must also consider whether the tenant's business is viable but for the impact of the pandemic.

If the arbitrator forms the view that the business is not viable, then the referral should be refused. The referral must also be refused in the event that the arbitrator forms the view that an agreement in relation to the protected rent debt has already been reached between the parties themselves. Parties should take care to ensure that any agreement they may reach over the rent is properly documented so that there is no ambiguity over whether they have reached agreement.

Having accepted the referral, the arbitrator must then consider the submissions made by each party and make their decision based on the two overarching principles. The first is that they must preserve or restore the viability of the tenant's business whilst balancing that with preserving the solvency of the landlord. Secondly, the tenant should meet its obligations to pay the protected rent debt in full and without delay, so far as that is consistent with the need to preserve or restore the viability of their business. It is anticipated that the arbitrator will be able to discount, perhaps significantly, the amount of rent the tenant has to pay, and can also direct that it should be paid over time, rather than all at once.

The award should be published by the arbitrator, although confidential financial information should not be revealed. There is also a mechanism permitting an appeal against the award, and enforcement of it in the event that either party fails to comply.

As with any new scheme, it may take a little while for the application of the rules to become clear. It may also be difficult to extract clear principles from the process, as every arbitration will be determined on its individual merits. For those reasons, landlords and tenants should endeavour to reach agreement between themselves, rather than engaging in the uncertainty and expense of the arbitration process. However, in the event that they are unable to agree the issues between themselves the arbitration scheme does at least allow a means of resolving their differences.

It is, though, important to remember that any referral must be made by no later than 24 September 2022.