Government consults on lifting commercial rent restrictions

Following the outbreak of the COVID-19 pandemic in the UK, the Government introduced certain protective measures for commercial tenants which included a moratorium on forfeiture action for non-payment of rent and a restriction on the use of the Commercial Rent Arrears Recovery ("CRAR") enforcement procedures (e.g. the ability to recover rent arrears through the seizure of tenants' goods). 

The moratorium, when in place, prevents landlords of commercial property from forfeiting leases based on non-payment of rent. Along with other measures, it was aimed at giving temporary relief to businesses that could not trade due to lockdown and COVID-19 restrictions. Initially, the moratorium was put in place as a temporary measure from 26 March 2020 to 30 June 2020 and has been extended on a number of occasions since then with the latest extension due to expire on 30 June 2021.

Other measures included restricting the presentation of statutory demands and winding up petitions so that, for example, a winding up petition can only be presented against a tenant company if a creditor has reasonable grounds to believe that COVID-19 has not had a financial effect on the tenant debtor or the tenant would have been unable to pay its debts even if COVID-19 had not had a financial effect.  The Government also published a voluntary Code of Practice in June 2020 setting out guidance for landlords and tenants on "best practice for reaching a negotiated agreement regarding rent debt and ongoing lease terms…"  (See Government code published for commercial property arrears during COVID-19 | Charles Russell Speechlys)  This voluntary code is due to remain in force until 24 June 2021 unless extended.  More recently, the Government has published an Annex to the Code of Practice providing a form for tenants to complete about the impact of the COVID-19 pandemic on their ability to pay rent and service charges from 25 March 2020 and a form for landlords to complete in response to an offer from a tenant about the payment of rent and service charges.

The idea was that these measures would, in the Government’s words, "provide time and space for landlords and their tenants to come together to negotiate fair and sustainable terms to deal with accumulated rent debt and ongoing lease terms as we embark upon the recovery."

What started out as temporary relief measures for commercial tenants, has now been in place for over a year and the Government recognises that these cannot continue indefinitely and that now is the time to consider "a carefully managed exit." With the end of the COVID-19 restrictions in sight, according to the Government's roadmap,  the Government has launched an open consultation, the "Commercial rents and COVID-19: call for evidence",  to help decide "on the best way to withdraw or replace these measures while preserving tenant businesses and the millions of jobs that they support."

The Government has invited input from anyone "with an interest in or connection to the commercial property market in England" to give the Government better insight into how landlords and tenants are dealing with the accrued rent arrears, and if and how lease terms have been adjusted to deal with the repayment thereof, which in turn will assist the Government in understanding "the risk to economic recovery posed by remaining rent debts".  The Government has also clarified that it does not intend to cover commercial rent debts in the overall COVID-19 rescue package.

The consultation survey asks for comments and figures in respect of the current measures and their financial impact on a party's business and ability to employ staff. It then provides a number of possible exit options.  Consultees are asked to provide comments on each option with an indication of how it would affect business and then asked to rank the options in order of preference.  The consultation relates only to the forfeiture moratorium and CRAR restrictions, it does not relate to the restrictions on the use of winding up petitions and statutory demands. However, the Government is “interested in the length of time for which these measures should be in place and how they relate to the other measures” which is why the survey also invites comments on the insolvency restrictions.

In summary, the various options that the Government is proposing and seeking comments and views on are as follows:-

Option 1 – allow these measures to expire on 30 June 2021:

• This would mean a return to "normal" in that landlords would be able to forfeit leases for non-payment of rent and/or use CRAR to recover arrears again.

Option 2 – Allow the moratorium on commercial lease forfeiture to lapse on 30 June 2021 but retain the insolvency measures and additional rent arrears amendments to CRAR for a period of time:

• Landlords will be able to forfeit leases for non-payment of rent but they would not be able to use CRAR, serve statutory demands, or serve winding up petitions. The idea behind this option is to ensure that a single landlord cannot make a tenant company insolvent on account of non-payment of rent.

Option 3 – Target existing measures to businesses based on the impact that COVID restrictions have had on their businesses for a limited period of time:

• This option would envisage a delay in lifting the safeguards for those tenant businesses that are most affected by the COVID-19 restrictions (e.g. restaurants) until they are able to make current and future payments. In sectors that have been less affected (e.g. offices and industrial), landlords  would be able to take steps to forfeit leases for non-payment of rent or use CRAR.

Option 4 – Encourage increased formal mediation between landlords and tenants:

• Mediation would be encouraged between landlords and tenants to try and agree a settlement in respect of any outstanding issues.

Option 5 – Non-binding adjudication between landlords and tenants:

• It is envisaged that this could be a precondition before disputes can be escalated to the Courts. The survey also asks for comments on the remedies that should be available to adjudicators, ranging from partial waivers of rent to changes of the contractual terms of the lease.

Option 6 – Binding non-judicial adjudication between landlords and tenants:

• Legislation would need to be passed to make it mandatory for parties to engage in adjudication to reach an agreement on the built-up rent arrears unless a rent agreement has already been agreed. As under Option 5, the survey asks for comments on the remedies that should be available to adjudicators, ranging from partial waivers of rent to changes of the contractual terms of the lease.

These options range from everything going back to "normal", to encouraged dispute resolution, to possibly seeing an interference in the contractual position agreed at the outset.

It is clear from the range of options that the Government is considering a full spectrum of possible scenarios from a complete lifting of restrictions to legislative intervention to force landlords and tenants to adjudicate in relation to rent arrears where no agreement is reached. Options 5 and 6 are particularly noteworthy in that they envisage providing an adjudicator with the power to vary the terms of the lease agreed between the parties.  It is very rare to find a power to interfere with contractual arrangements between commercial landlords and tenants.  No doubt there will be differing views as to the best exit route from the restrictions affecting commercial properties.  Therefore, landlords, tenants, and other professionals in the property industry may wish to respond to the call for evidence to ensure that their views are taken into account when the Government determines the next steps.  The consultation will close at 11:45pm on 4 May 2021 and can be accessed here.