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  and Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others  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.