United Kingdom: Extension of COVID-19 enforcement and rent recovery restrictions for commercial leases

In brief

Restrictions preventing eviction of commercial tenants for non-payment of rent will remain in place until 25 March 2022, the UK government announced on Wednesday 16 June, with rent recovery restrictions also extended to variable dates.


Contents

Key Takeaways

  • A Call for Evidence on payment of commercial rents was undertaken earlier in 2021, in which the government obtained feedback on potential steps it could take after the scheduled 30 June 2021 moratorium expiry. A government response to this Call for Evidence will be published in due course.
  • Section 82 of the Coronavirus Act 2020 introduced a temporary suspension of landlords' rights to forfeit business leases for non-payment of rent until 30 June 2020. This has subsequently been extended four times, on a quarterly basis: to 30 September 2020to 31 December 2020to 31 March 2021; and to 30 June 2021.  It has now been extended until 25 March 2022 for all businesses. However, tenants are encouraged to pay rent in accordance with their lease or agreed concessionary arrangements.
  • Landlords remain able to take enforcement action for breaches of covenant other than non-payment of rents.
  • Following expiry of the extended moratorium, arrears relating to the period that businesses have had to remain closed during the pandemic will remain "ring-fenced".  Parties are expected to agree to share the financial impact of this unpaid rent, and if agreement cannot be reached the parties will be subject to a new, binding arbitration process. Full details of the "ring-fencing" mechanism are awaited and much of the detail remains unclear.
  • The limitations on landlords' use of Commercial Rent Arrears Recovery (CRAR) will remain in place until 25 March 2022, and require 544 days' outstanding rent for implementation.
  • Current restrictions on the service of statutory demands and winding-up petitions imposed by the Corporate Insolvency and Governance Act 2020, which were due to expire on 30 June 2021, will be extended for "a further three months" until the end of September 2021.
  • Landlords retain rights to recover rent through application to the court, withdrawals from rent deposits (where in place) or claims against any existing guarantor of the lease.
  • The Code of Practice introduced on 19 June 2020, and updated on 6 April 2021, continues to apply until at least 24 June 2021. As yet, there has been no announcement made as to the extension of the Code. This temporary, voluntary and non-binding code encourages fair and transparent discussions between landlords and tenants over rental payments during the COVID-19 pandemic, and includes guidance on rent arrears payments.
  • A government review of "outdated" commercial landlord and tenant legislation has previously been proposed to consider better collaboration between parties, and to ensure the recovery of high streets and town centres.  The government has now delayed this review until late 2021.

 

In more detail

Commercial real estate stakeholders actively lobbied the government in the run up to the latest moratorium extension. The British Property Federation had called for the moratorium to expire on 30 June as planned.  Despite an estimated £6bn owing in rent arrears, its research suggested that 50% of back rent had been repaid, and that most landlords and tenants are working collaboratively. On the other hand, trade bodies such as UK Hospitality pushed for further economic support, amid claims that the hospitality sector had lost more than £87bn over the last year, leaving businesses deeply in debt and at risk of suffering “economic long COVID” without further support.

In response to pressure from tenant bodies, the results of the recent Call for Evidence and the government's delay in fully lifting COVID-19 lockdown restrictions, the government has announced an extension of the moratorium curtailing landlords' rights to forfeit business leases for non-payment of rent until 25 March 2022. This nine-month extension will apply to all businesses, not merely those which remain subject to trading restrictions. We anticipate that this extension will be enacted by amendment to s82 Coronavirus Act 2020. 

In addition to the moratorium's extension, the government has also:

  • extended, to 25 March 2022, the current restrictions against use of CRAR by landlords, requiring 554 days’ outstanding rent required for CRAR to be used to implemented;
  • extended by three months (to the end of September 2021) the restrictions against use of statutory demands and winding-up petitions as a means of rent recovery where a company "cannot pay their bills due to coronavirus".

Immediate response to these extensions are, understandably, mixed. For landlords with their own borrowings to finance, the move comes as a fresh blow, whilst there is undoubted relief for struggling tenants. For thriving tenants, it is also an unexpected bonus, as many had expected any moratorium extension to be limited to those tenants in sectors hardest hit by the pandemic. Whilst tenants are encouraged to pay rents going forward, failure to do so will not permit forfeiture action by landlords until 25 March 2022.

For this latest moratorium extension, however, the devil is in the detail.  Affected parties should take into account the following complexities:

  • Those rent arrears which relate to the "specific periods of closure" after March 2020, during which the relevant business has not been permitted to open due to lockdown restrictions, will be "ring-fenced".  No forfeiture is permitted in respect of ring-fenced rent arrears at all, whether before or after 25 March 2022.  From 25 March 2022, landlords will only be able to forfeit commercial leases for unpaid rents that are not ring-fenced arrears. This is a complex position which raises a number of issues as outlined below.
  • Landlords have been told to "make allowances" for the ring-fenced rent arrears and to "share the financial impact with their tenants".  How this will be enshrined in primary legislation is not yet clear, but the government has said "this could be done by waiving some of the total amount or agreeing a longer-term repayment plan."
  • If the parties cannot agree a rental concession for the ring-fenced arrears by negotiation, the government has announced that the legislation will establish guidelines for a new, binding arbitration process, to be delivered by private and impartial arbitrators. 

This new, complex arrangement will be introduced by primary (and as yet undrafted) legislation. A number of questions arise from the points above, and it is not yet clear if or how these might be addressed by statute. For example, the position on rent arrears for sectors which have been moved into and out of trading restrictions during the pandemic - - such as non-essential retail and eat-in restaurants - is unclear. In addition:  

  • Lockdown restrictions have not been relaxed or re-imposed in line with the usual quarter days. Will apportionment apply, even if there is no contemplation of apportionment in the lease? 
  • How will the ring-fencing operate in relation to office leases?  For these premises, does "restrictions on trading" equate to government advice to work from home where possible?
  • What is the position on ring-fencing rent debts due from businesses that were subject to restrictions, but still able to trade profitably, such as restaurants offering take-away meals? 
  • Where retail premises are partly essential, and partly non-essential, would all rents be ring-fenced?

The announcement of arbitration comes as a surprise, following the proposals for binding or non-binding adjudication that were set out in the Call for Evidence.  Adjudication can be quicker than arbitration, though it can increase the risk of a decision becoming public if challenged in court.  Adjudication is cheaper than arbitration, and costs are usually shared equally unless agreed otherwise, with each party covering its own legal fees.  In comparison, the arbitration tribunal usually has the power to award costs against the unsuccessful party.  Where the "carrot" of the Code of Practice has not worked, perhaps the "stick" of binding, expensive, time-consuming arbitration may be the backstop that is needed to bring reluctant landlords or tenants to the negotiating table, in order to reach agreement on COVID-19 rent arrears.   But questions remain in relation to the legal practicalities of this new method of recourse.  What of leases that never contemplated arbitration as a method of dispute resolution? And does the statutory imposition of arbitration interfere with the contractual bargain between the parties?

There is obviously much for the new legislation to make clear. From a tenant perspective, however, this latest extension provides welcome breathing space, particularly in the non-essential retail, hospitality and leisure sectors, who have been hardest-hit by COVID-19 trading restrictions.  The government has also re-iterated its message from the Code of Practice that tenants should continue to pay rents where they are able, and that parties should negotiate to reach a solution on rent arrears without delay. This is now given teeth by the threat of binding arbitration where agreement cannot be achieved.

However, recent case law makes it clear that an amicable solution cannot always be reached: and the option of pursuing a money judgment for rent arrears in court remains.  In both Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] and Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021] the court had sympathy for the position of landlords whose tenants failed to pay rent during the pandemic, and reiterated that a debt claim actioned through court proceedings was in no way the exploitation of a legal loophole.  Landlords also remain able to make withdrawals from rent deposits (where in place) or claim against any existing guarantor of the lease.

This is the first time during the pandemic that the restrictions on enforcement and rent recovery have been suspended for a clear, long-term period and, although they are unlikely to be welcomed by landlords, the longer-term clarity does provide an opportunity for a strategic longer-term review of unpaid rents across a portfolio.

 

For further information and to discuss what these measures might mean for you, please get in touch with your usual Baker McKenzie contact.

 

 


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