New legislation on commercial rent debt: what we know so far

Unfortunately, the Government’s statement will still leave a lot of questions unanswered for many landlords and tenants desperate for some certainty as to what will happen moving forward. Until the draft legislation or further guidance is published, this is what we know so far:-

• There will be legislation to ringfence debt accrued during the pandemic by businesses affected by enforced closures together with a process of binding arbitration, which is to be used as a last resort where other negotiations have failed.

• Parties are encouraged to negotiate waivers or deferments of an appropriate portion of arrears.

• Prior to implementation of the legislation, the Government will set out the principles which they would look to include in the legislation within a revised Code of Practice. Parties will therefore have time to negotiate further on the basis of those principles before the legislation takes effect.

• The prohibition on forfeiture of commercial leases for rent arrears will continue until 25 March 2022, unless the legislation is in place prior to that date.

• The Government has made it clear that if a tenant has not been affected by closure, and they have the means to pay, then they should pay. Further, the Government expects rent to be paid as per the lease from the point that the tenant’s sector restrictions were lifted.

• Once the proposed legislation comes into force, the protection measures will only apply to ringfenced arrears. The definition of “ringfenced” appears to be rent debt accrued from March 2020 (no specific date) by those tenants affected by closures, until the point that restrictions for their sector were lifted. Therefore rent arrears accrued prior to March 2020, and after the sector restrictions were lifted, and also rent arrears accrued (at any time) for those tenants who were not affected by business closure should all be actionable without restriction. Interest can also be charged from the end of the ringfenced period.

• The proposed system of binding arbitration will be introduced in this parliamentary session.

To encourage negotiation prior to the legislation, the Government has already:

• extended the current protection/restrictions until 25 March 2022.
• extended the restrictions on the use of Commercial Rent Arrears Recovery to 25 March 2022, unless more than 554 days’ worth of rent is due.
• extended the restrictions on serving a winding up petition on the basis of a statutory demand until 30 September 2021. Statutory demands and bankruptcies against individuals remain unaffected.

The proposed arbitration

Where an agreement has not been reached following negotiations, both the landlord and the tenant will need to undertake binding arbitration. The parties are expected to share the financial burden, indicating the landlords might not recover 100% of the sums due, or that any payment plans could be over long periods.

The arbitration process will apply to all commercial rent debt accrued as a result of Covid closure in sectors impacted by Non-Pharmaceutical Interventions (NPIs) (which means actions to limit the spread of the pandemic, i.e. closures).

Tenants will also be bound by the decision of the arbitrator and will have to pay debts accrued during the ringfenced period in accordance with any decision made. There is no further information on this at present.

It is intended to be impartial (via a set of clear rules) and only used as a last resort, providing a faster and easier resolution than the courts. Both parties will be expected to contribute towards the cost of the arbitration, but the arbitrator can also make a decision as to costs if a party is found not to have negotiated in the spirit of the legislation principles.

What we don’t know

• Precisely how the arbitration will work and the scope of the arbitrator’s powers
• What definitions will be in place to determine if the relevant arrears are “ringfenced”
• How long the legislation will remain in place

It is hoped that further information will be available in the coming weeks.