Originally intended to last for three months, the moratorium on commercial lease forfeiture was announced on 21 March 2020, as the Coronavirus pandemic threatened business tenancies across the country. Now, as of 25 March 2022 and after a number of extensions, the moratorium has come to end.
In response to the changes, Laura Offer, a solicitor in our Property Litigation Team, has recorded some guidance on the new legislation. Here, Laura explains what the new law hopes to achieve and provides guidance aimed at commercial landlords seeking to recover commercial rent arrears.
Take a look at this in-depth breakdown of the Commercial Rent (Coronavirus) Act 2022 in the video or read through the transcript below…
Video sub-topic timestamps:
00:00 – Introduction to the Commercial Rent (Coronavirus) Act 2022
00:41 – Why has the Commercial Rent (Coronavirus) Act 2022 been passed?
01:40 – What does the Commercial Rent (Coronavirus) Act 2022 do in practice?
03:10 – What will the new process involve for commercial landlords and tenants?
06:10 – Does this new Coronavirus Act legislation apply to all commercial rents?
07:26 – Are there any specific considerations for landlords in respect of the Commercial Rent (Coronavirus) Act 2022?
So the new process is an arbitration process. It’s been set out within this new legislation in order to help landlords and tenants decide how much of the tenant’s arrears should have to be payable and we would always, in the first instance, advise our clients try and come to a deal directly with their landlord, their tenant, but we appreciate sometimes that’s simply not possible no matter how hard you try and so this new regime is there to assist landlords and tenants in deciding what to do about these arrears.
In March 2020, the government put in place a number of measures to protect businesses, in particular on the high streets, and one of those measures was a moratorium on commercial forfeiture, especially for commercial rent arrears.
So, as a result, since March 2020, initially for just three months, commercial landlords have been unable to reenter or forfeit their tenants’ commercial premises and forfeit the lease for rent arrears.
That was initially supposed to be for three months but of course the pandemic’s gone on a lot longer than anticipated and after a series of extensions, it finally came to an end on the 25th of March this year (2022), having been in place for just over two years.
Parliament has just recently passed the Commercial Rent (Coronavirus) Act 2022, which puts in place a scheme of rules designed to assist landlords and tenants in dealing with whatever rent arrears may have accrued over the last couple years during temporary legislation which prohibited forfeiture of commercial leases by landlords
The aim of the new regime is to avoid the cliff edge that, with the end of the moratorium, would otherwise be fast approaching for commercial tenants, given that we’ve had two years during which tenants could have been accruing these arrears that landlords have been unable to deal with until now.
And the government recognises that landlords have been unable to do anything about rent arrears for an awfully long time now and that actually the moratorium has needed to come to an end. However, the government also recognises that actually there may will be commercial tenants with up to two years of rent arrears that have accrued and in cases where those rent arrears have accrued because of the restrictions that been put in place by the government, there needs to be some assistance from the government by way of legislation, to ensure that that doesn’t become the nail in the coffin for the tenants’ business.
So in the first instance, the landlord or the tenant will serve the other with a notice saying that they want to make a referral to the arbitrator and that notice will include their proposals for how these rent arrears should be dealt with.
The other party can accept those proposals, but also they can respond within 28 days with proposals on their own and if at the end of that process, the parties have reached an agreement, it can then be referred to one of the arbitrators.
The arbitrator will then deal with it by way of a three-stage process:
Stage One: So, stage number one is all about the viability of tenants’ business. If the tenant has a viable business and it’s viable even without a penny’s rate reduction, then the arbitrator will strike the reference out. Likewise, if the tenant’s business just simply isn’t viable, even if there was a complete waiver of all of the rent arrears that had accrued the referral would be immediately struck out.
Stage Two: If the parties get past that first stage to the second stage, then the arbitrator is going to deal with the two proposals by the landlord and tenants in accordance with the arbitrator’s principles and those principles are to preserve or to restore and preserve the viability of the tenant’s business, so far as it is consistent with the landlord’s solvency. This is a really important thing for landlords to understand, that this isn’t just about keeping the tenant in business. Actually, if keeping the tenant in business is going to come at the expense of the liquidity, the solvency of the landlord, then the arbitrator just simply won’t do it.
What the arbitrator will do is take a look at the two proposals from the landlord and the tenant, and they will decide to what extent are those proposals consistent with those arbitrator principles.
If they’re both consistent with the principles, then the arbitrator will pick which of those principles is more consistent. If only one of them is consistent, then the arbitrator must make an award in line with that consistent proposal and if neither of them are consistent with the arbitrator’s principles, then it will move to the third stage of that three-stage test.
Stage Three: The third stage of that three-stage test is the arbitrator’s discretion. So, the arbitrator will be able to look at the parties, look at their proposals, look at the evidence that has been put before him and make a decision based on his own discretion as to what the tenant should pay in response to those rent arrears.
Crucially, these changes apply to what the government is calling “protected rent arrears” which are arrears that have accrued during the “protected” period. The protection period is going to be different on a case by case basis. It’s always going to start 21st of March 2020, but the protected period then continues for whatever period the government had pandemic related restrictions in place for a tenant’s particular industry sector.
So, at the latest, that’s going to be 19th of July 2021, but the protected period may well end for some tenants earlier than this and any arrears accrued during that protected period are what the government is calling “protected rent arrears”.
Any unprotected rent arrears aren’t subject to these rules and landlords are entitled to carry on in the pre pandemic way, pre moratorium way, immediately without having to concern themselves in respect of unprotected arrears.
Yes, one thing that is really important for commercial landlords to know, especially if they believe they have unprotected arrears, is that any rent received during the protected period, i.e. any rent received since 21st of March 2020, must be allocated to unprotected arrears.
An awful lot of landlords may well believe that they’ve got unprotected arrears and that they can proceed immediately, but actually, in many cases, they may not and it’s important that landlords take independent legal advice before they take any action to ensure that they’re not going to open themselves up to a risk of committing wrongful forfeiture.
If you have any questions regarding the impact of the Commercial Rent (Coronavirus) Act 2022 or are seeking up-to-date legal advice on property dispute matters, contact Laura Offer on 01202 294 566 or email [email protected]. Alternatively, contact a member of our Commercial Property team in Bournemouth.
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