4th March 2022
Property lawyer from Leonard Curtis Legal, Alicia Renshaw, looks at what the change in the law is likely to mean for both landlords and tenants.
Landlords have been prevented from taking action to recover most rent arrears throughout the pandemic – but that is due to end shortly. They will be keen to recover those liabilities that have accrued over the past two years – but will getting the money back be that simple?
The restrictions on forfeiture for rent arrears and the use of Commercial Rent Arrears Recovery (CRAR) are set to end on 25 March 2022. Additionally, the ability to present a winding up petition in respect of “rent, or any sum or other payment that a tenant is liable to pay” under a business tenancy and “which is unpaid by reason of a financial effect or coronavirus” is set to end on 31 March 2022. Having been frustrated by an inability to act for some time now, we are sure many landlords will be looking to use these remedies to recover arrears that have accrued over the past two years once these deadlines have passed. However, unfortunately for landlords, it is not going to be that simple.
The Commercial Rent (Coronavirus) Bill – a Bill to make provision enabling relief from payment of certain debts under business tenancies adversely affected by coronavirus – is set to be implemented sometime in March 2022. This Bill is being introduced to give breathing space to tenants with rent arrears that have accrued for businesses who were forced to close during the pandemic.
Leonard Curtis property expert, Jason Martin, discussed the Bill in more detail in December. Put simply, it introduces a binding arbitration process for qualifying businesses who have not been able to reach agreement with their landlords. For a period of six months after the Bill is passed, a tenant or landlord can seek arbitration – they must make a proposal for resolving payment of the arrears and the other party will have 14 days to submit their own proposal.
In reality, it means that landlords and tenants will be encouraged, and in fact expected, to try and reach agreement over how arrears are dealt with before the courts will allow legal remedies to be used.
So, what should landlords and tenants be doing?
It has been made clear time and time again that tenants should be paying the rent to their landlord if they are capable of doing so. In instances where the tenant has not been particularly affected by covid and has purposely decided not to pay its rent then the landlord should hopefully be able to rely on their usual remedies for recovering sums due under commercial leases.
Tenants who have struggled during the pandemic but not been required to close will not have the protection of the new Bill – they cannot expect any preferential treatment – and therefore should be planning ahead and liaising with their landlord to see if they can come to some form of arrangement in relation to the arrears. A tenant in this situation does not want to wait until the restrictions are lifted on 25 March 2022 before doing anything otherwise they could find the landlord using CRAR (typically available once a tenant is seven days in arrears – which could be 1 April provided the new legislation does not require six months’ rent arrears to be able to initiate recovery) or forfeiting their lease to recover those arrears which could be costly as well as operationally inconvenient.
There will, however, be tenants in sectors such as hospitality or travel who were affected by covid and who, due to their forced closure, are unable to pay the rent arrears. Those arears accrued during the period of forced closure will be termed “ring-fenced arrears” and will be protected by the provisions of the above-mentioned Bill.
As highlighted in Jason’s article, it has been suggested that the Bill will prevent a landlord from pursuing their usual remedies for unpaid rent – CRAR, use of a rent deposit or issuing a winding up petition – in respect of those ring-fenced arrears from the date the Bill is passed until any arbitration has been concluded (or the six month window has expired). Landlords could therefore have to wait longer than they expected especially where the tenant has been forced to close.
In these instances, landlords should be planning ahead and taking steps to reach some agreement with the tenant as to how to deal with those arrears. In particular, they are being expected to share some of the tenant’s burden by agreeing to waive some or all of those arrears. If the landlords and tenants of those ring-fenced arrears have not been able to reach agreement then they may be forced into arbitration and it has been suggested that where a landlord has not been willing to share some of the burden, it may be held against them in any arbitration. Furthermore, if they are forced into arbitration, they are not going to be able to use their remedies for unpaid rent until that process has concluded.
Due to the current situation, a landlord may feel that the best course of action is to engage with any struggling tenants to find a solution to the rent arrears rather than face the possibility of incurring costs to instigate CRAR or even forfeit the lease. As well as these costs, there are also commercial considerations as, unless they have a highly desirable property, a landlord is likely to want to have a tenant in occupation rather than face the possibility of having an empty unit on which they would be required to pay empty unit rates. Therefore, a landlord may be willing to work with a tenant to allow time to repay the arrears rather than not receive any rent at all.
The changing legal landscape in the property arena is going to keep things interesting for both landlords and tenants so, if you have any clients that need property advice then don’t hesitate to get in touch.
Alicia Renshaw, Leonard Curtis Legal – alicia.renshaw@leonardcurtislegal.co.uk
Jason Martin, Leonard Curtis Property Solutions – jason.martin@leonardcurtis.co.uk