Government launches a new rent arrears Code for COVID stricken businesses with legislative teeth
Throughout the pandemic the government has taken steps to try and ensure that businesses survive the strict lockdown measures that were put in place.
The imposition by the government of successive moratoriums preventing landlords from using forfeiture or insolvency measures to recover arrears have also helped.
The current moratorium is due to expire on 25 March 2022. A voluntary code for commercial landlords and tenants was first introduced back in June 2020, with the aim of encouraging landlords and tenants to try and negotiate and settle rent arrears where possible, but also encouraging tenants who could pay, to pay.
This has now been replaced by a new Code of Practice which will be supplemental to legislation which will be introduced by the Commercial Rent (Coronavirus) Bill, which will establish a legally binding arbitration process for commercial landlords and tenants who have not already reached agreement on existing rent arrears.
The government estimates that about 80% of landlords and tenants have already reached agreement to settle outstanding rent arrears. This new Code and Bill will not apply to existing agreements that have already been made.
Who does the Code apply to?
The Code applies to all commercial leases held by business tenants that have built up rent arrears due to an inability to pay because of the COVID-19 pandemic. This includes the hospitality, retail, leisure, manufacturing, industrial, logistics, and food and drink sectors.
What is its purpose?
It seeks to encourage landlords and tenants to reach a settlement and agreement on rent arrears. The tenant’s ability to pay needs to be balanced against the risk to the landlord’s solvency, and it is to encourage landlords and tenants to be transparent and act in good faith in their dealings to ensure they reach agreement.
What is the purpose of the Commercial Rent (Coronavirus) Bill and who will it apply to?
The purpose of the Bill is to introduce the binding arbitration process which will support the Code, so that if parties cannot reach agreement for qualifying rent arrears, then either party can apply for the matter to be determined by an arbitrator through going through the relevant arbitration process.
Not all landlords and tenants will be able to apply to binding arbitration. It will only apply to England, Wales and Northern Ireland businesses which closed or ceased trading in whole or in part, including non-essential shops which could only open for collections because of the regulations introduced during the COVID-19 pandemic. Pharmacies are expressly excluded from the arbitration process.
What arrears will it apply to?
It will also only apply for ring fenced arrears of rent, service charge and insurance which apply from 21 March 2020, the date of the first lockdown, until the last date the restrictions were removed from the relevant business sector.
The Code quotes the examples of a retail clothing shop ring fence period will apply from 21 March 2020 to 12 April 2021 and a café from 21 March 2020 to 18 July 2021
The Code sets out the relevant dates for the businesses it applies to in Annex A.
What will the Bill do?
- it will temporarily prevent remedies such as forfeiture from being used by landlords for ring fenced arrears until a settlement has been reached or if an application is made for arbitration when an appeal to an arbitration decision has been passed, or the timescale for making an application for arbitration has passed without such an application being made;
- it will restrict the use of winding up petitions , commercial rent arrears recovery, as well as forfeiture for ring fenced arrears;
- landlords will not be able to issue debt proceedings whilst arbitration is ongoing and the debt proceedings may be considered in the arbitration;
- landlords will not be able to withdraw funds from a rent deposit to cover ring fenced rental arrears . If it has already taken money to cover such debts, the requirement to top-up will be suspended;
- CVA’s and other restructuring plans will not be available for ring fenced arrears where an arbitration has been applied to that debt for a period of 12 months from when the arbitration settlement is awarded.
What is the timescale for applying for arbitration?
An application to an arbitrator must be made within 6 months of the passing of the the Commercial Rent (Coronovirus) Bill.
Is there a limitation period for the rent arrears to be paid?
Any ring fenced rent arrears cannot be subject to an agreement of repayment which is more than 24 months, to ensure a return to normality as soon as possible.
Is there a procedure for arbitration?
There is a set procedure for making an application to the arbitrator which is available to either the landlord or tenant, but they will have to go through preliminary correspondence and notification of the intention to apply to an arbitrator , demonstrating the relevant principles and behaviours set out in the Code, which will be taken into consideration by the arbitrator in making his decision.
The introduction of such legally binding arbitration in conjunction with a Code to force parties to settle their dispute is unprecedented in agreements between landlords and tenants in this country. In doing so the government has underlined its determination to support tenants’ businesses and encourage landlords and tenant to collaborate to do so and for legal redress if they do not with a view to a return to normality as soon as possible.