Commercial rent arrears: the new law

Late March saw the end of some long-standing temporary changes in the law due to COVID-19, and the introduction of some new ones!  Commercial landlords and tenants are affected.

From early in the first lockdown in 2020, commercial landlords were banned from exercising most of the usual remedies available to them to enforce rent arrears that fell due during the period of the pandemic, as a measure to protect tenant businesses.

The banned remedies included forfeiture of leases due to rent arrears (although not on other grounds); commercial rent arrears recovery using bailiffs, unless the arrears were sufficiently large to have included a period pre-COVID; and statutory demands and winding up petitions against tenants based on rent arrears (but for corporate tenants only).

We wrote about these changes at the time: https://www.bermans.co.uk/practical-advice-for-landlords-and-tenants-of-commercial-property/

That was in July 2020 and in fact the main prohibitions continued well beyond 30 September of that year, the current deadline at the time.

An estimated £9 billion is now owed in deferred rent across the UK, much of it by SMEs.  Retail and hospitality are, as expected, believed to be the hardest-hit sectors.

The latest changes

The remedies refereed to above, which had been banned, can now be taken by landlords once again – though not in all cases (see below).

This is naturally better news for landlords but many tenants will be concerned about the impact on their business.

Tenants can take comfort from the Commercial Rent (Coronavirus) Act, which received Royal Assent on 24 March.  Nearly all of its provisions came into effect immediately and will be in place until at least 23 September 2022.  It has replaced the previous voluntary Code of Conduct mentioned in our 2020 article.

https://www.legislation.gov.uk/ukpga/2022/12/contents/enacted

Arbitration

The Act has introduced a binding arbitration scheme for resolving rent claims against tenants for periods when their businesses were closed or severely disrupted by COVID-19 (Protected Rent Periods) if the landlord and the tenant cannot reach agreement.  The arbitrator will aim to balance the need to ensure the viability of the tenant’s business against the landlord’s solvency, and can grant the tenant time to pay or order that the amount due be reduced – even to zero.

However the Act only applies to tenancies where there has been a forced closure due to COVID, e.g. hospitality, personal care and non-essential retail, in cases where there was a forced closure, it also applies to further periods of restriction short of outright closure, such as when pubs were allowed to reopen with table service only.

Further moratorium

In those sectors where the Act applies there is a new prohibition on landlords from taking various types of enforcement action against their tenants for Protected Rent Periods as defined above.  This time individual tenants, as well as companies, are protected.

Therefore in some sectors the new laws will be less favourable to landlords, since suing a tenant or issuing a bankruptcy petition for rent arrears have remained available as options during the pandemic.

All this, of course, comes against a backdrop of rising inflation and energy costs and a likely squeeze on consumer spending, among other challenges for businesses.

Landlords will be relieved at having (in many cases) more options against their tenants who have not paid.  However they should also take care not to take steps which could force a good tenant to leave (or not renew their lease when the time comes), or drive the tenant out of business, unless they are confident of being able to relet to a tenant of equal if not better standing.

Tenants should seek to take the initiative in establishing their landlords’ intentions.

My colleague, author of our 2020 article, now writes about the opportunities for landlords and tenants to renegotiate terms to improve the prospects of an acceptable outcome for them both.

Lease renegotiation

The property sector was significantly affected by the Covid pandemic and even now many businesses are still opting for hybrid working.

This imposes new challenges on the property sector for both landlords and tenants.  What types of spaces and on what terms will workspaces be required in the future? Business owners need to consider what best suits their needs and take steps to ensure their business is ready for the post Covid environment.

Additionally, if you rent your business premises, the pandemic may have left you with significant rent arrears and (whilst these will be covered by the arbitration process mentioned earlier) you do need to think about how you are going to manage this moving forward. Are the premises right for the business needs now?

We would always encourage dialogue with your landlord and you should use the existing terms as the starting point for any discussion.  Are there any break clauses or rent reviews written into the contract? Even if there aren’t, landlords may be receptive to a discussion as it will be in their long term interests to retain you as a tenant, even if on reduced terms. Your current landlord may also have alternative premises that better suits your needs.  It is far better to start this review process now and even if you have a few years to run on existing arrangements, take steps to source the terms and premises for your business’s future.

If you would like some guidance about negotiating with your landlord, please contact our Property & Construction Team, on 0151 224 0500