Restrictions, ringfencing and recovery: extended tenant protections announced by government

We also now have an indication as to how the Government proposes to address the rent arrears that many tenants will have accumulated.

Extension of the current measures

The Government has announced that:

• the moratorium on a commercial landlord’s right to forfeit a business tenancy for non-payment of rent will be extended until 25 March 2022;
• a landlord will continue only to be able to use the Commercial Rent Arrears Recovery (CRAR) procedure to recover rent which has been outstanding for at least 554 days; and
• the restrictions which prevent a landlord from serving a statutory demand and limit its ability to present a winding-up petition will be extended until 30 September 2021.

These restrictions continue to apply across all sectors: the Government’s call for evidence on the end to restrictions envisaged possible tailoring to different types of business, but a uniform approach has prevailed.

While it remains open to a landlord to start court proceedings for unpaid rent as a debt, any judgment would be of limited use to a landlord if it had no practical means of enforcing it.

What are the proposals to deal with rent arrears?

The Government has announced that it will introduce legislation to ringfence outstanding unpaid rent that has accrued while a business has had to remain closed during the pandemic. The announcement made specific reference to hard-hit sectors such as nightclubs and hospitality, but it will logically extend to other sectors such as retail where the restrictions have been of more limited duration. The Government has stated that it expects landlords to make allowances for the rent arrears relating to these periods of closure and to share the financial impact with their tenants.

The onus will be on landlords and tenants to agree how to deal with these arrears: Business Secretary Kwasi Kwarteng urges parties “to keep working together to reach mutually beneficial agreements”, a point reiterated throughout the Government’s announcement. The announcement also suggests that this could be achieved through a waiver of some of the total amount due or an agreed payment plan. Many landlords and tenants have of course already reached agreements in relation to arrears and arrangements such as these will no doubt continue to be reached in many cases. However, there will be a binding arbitration process to cater for situations where the parties cannot reach agreement. The process will be delivered by private arbitrators in accordance with guidelines in the legislation (the detail of which is awaited). Arbitrators will be required to undergo an approval process to prove their impartiality.

Two major landlords, British Land and Landsec, had responded to the call for evidence by proposing binding arbitration as a “last resort” and their suggestion may have been taken into account by the Government.

The effect of the proposals

This proposed legislation marks a significant change in approach. The measures to date had suspended important landlord remedies, such as forfeiture, but they had not changed the underlying obligations of the parties. It is unclear, at this stage, what remedies arbitrators may be able to impose but a number of options set out in the Government’s call for evidence could have the effect of altering the commercial deal struck between the landlord and tenant.

The Chief Secretary to the Treasury, Steve Barclay, announced that the new measures would “help preserve jobs and livelihoods as we build back better”, thereby indicating that they are rooted in the desire to help struggling tenants. For many businesses they may prove just such a lifeline. As landlords know all too well, certain insolvency processes, such as the company voluntary arrangement (CVA) or the newer restructuring plan, can interfere with the contractual terms of leases. Based on the Government’s announcement, however, the new arbitration process will be available wherever there are arrears relating to a period for which premises had to close, regardless of the financial standing of the tenant.

How will this process work in practice?

Much of the detail of how this process will operate is unclear at this stage.

• As the British Property Federation have noted, many landlords and tenants have already negotiated discounts or other compromises. The Government announcement stresses that parties should continue to try to do so. The uncertainties around this process, and the fact that it will cover only arrears relating to a defined period, may mean many landlords and tenants prefer to reach a consensual deal. Arrears may span the periods for which premises had to be closed (which will be covered by the new legislation) and other periods, perhaps because tenants have not paid for entire quarters where lockdowns ended part way through. Notably in the case of some hospitality venues tenant businesses may have been allowed to re-open but could not profitably do so, for example due to social distancing rules. While tenants are obliged to pay for such periods, as noted below, landlords may be incentivised to agree terms governing the arrears as a whole rather than going through arbitration for some and still having to resort to court proceedings for the remainder.
• We await details of the guidelines the arbitrators must follow and the remedies that they will be able to award. It will be key to the success of these arrangements that there is a clear framework which ensures that awards are fair and consistent. As the arbitration will be binding, the ability to appeal decisions will be limited. Indeed, part of the driver for the Government of this process is no doubt to keep these disputes out of the courts, which are already stretched. A significant number of challenges to arbitration decisions would be just the sort of burden to the courts that it is trying to avoid. There is bound to be complexity to setting rental discounts and other concessions given the differing impacts on sectors and individual businesses. Some retailers may, for example, have been able to obtain some benefit from premises during periods of closure by using them to service online orders, and some restaurant tenants may have offered takeaway or outdoor services; others will have closed completely. Whether arbitrators will take account of such factors remains to be seen. It is also unclear whether the financial standing of the landlord and tenant and impact of payment (or non-payment) on them will in any way be taken into account.
• It is not yet clear how quick the arbitration process will be or indeed whether there will be sufficient arbitrators for the process to function smoothly. The involvement of accredited arbitrators in this process provides comfort around independence and qualification but those carrying out this role will presumably need some real estate experience and training.
• The announcement is silent as to where the costs of this process will fall. It may be the expectation that landlords will pick these up but, in an arbitration process which is already compromising landlords’ contractual entitlement to rent, this may prove a bitter pill.
• One area of complexity may be the interplay with third party arrangements. Agreeing to reduce or waive rents may put a landlord in breach of its financing documents. If the landlord is not the freehold owner but is itself a tenant under a superior lease, that superior lease may well provide that the superior landlord’s consent is required to such concessions. Landlords agreeing rent concessions may therefore have to document these matters with third parties. If arbitration imposes a new arrangement, that may not amount to a breach. This may mean that in some cases, landlords may have little choice but for arrears to be determined through the arbitration process rather than consensually. Neither a consensual arrangement nor arbitration would of course address the fact that landlords may well rely on rental income both to service debt and to meet their own rental obligations under superior leases. Conversely we would expect the legislation to provide that any rental discount would benefit not just the tenant but also a guarantor of its obligations, but this is as yet uncertain.

When must a tenant still pay their rent?

The Government has made it clear that businesses which are able to pay rent must do so. It expects tenants to start paying their rent as soon as the restrictions which apply to them are relaxed and they are allowed to re-open.  Communities Secretary Robert Jenrick stated that this would strike “the right balance between protecting landlords while also helping businesses most in need, so they are able to reopen when it is safe to do so”.

Two recent judgments made clear that tenants who were able to pay could not avoid landlord debt claims by relying on the Government’s Code of Practice for landlords and tenants, which was brought in as part of the Government’s pandemic measures. The voluntary Code of Practice, introduced in June 2020, sets out principles of behaviour for landlords and tenants, including around the negotiation of arrears settlements. The courts have held that the Code of Practice is not a “charter for tenants declining to pay any rent”[1] and is not applicable to tenants who are able to pay their arrears[2]. While the new arbitration process may benefit such tenants where their arrears relate to periods when their premises had to remain closed, the Government’s announcement reinforces that otherwise tenants are bound by their lease covenants and will be expected to pay their rents. Many landlords will be disappointed however that it will be another nine months before they can exercise many of their remedies.   

[1] Master Marsh, CommerzReal Investmentgesellschaft v TFS Stores Limited [2021] EWHC 863 (Ch)

[2] Master Dagnall, New York Mellon v Sports Direct and others [2021] EWHC 1013 (QB)