Rent arrears remedies will be available again to unpaid landlords
March 17, 2022
Of all the many restrictions placed on creditors to protect businesses during the pandemic, none have been as long lasting or wide ranging as those, which have prevented the enforcement of rent arrears throughout the crisis. This shelter has been vital to many viable but cash-strapped enterprises, but as from 25th March 2022, the full panoply of remedies will be available once again to unpaid landlords for future rent.
This begs the question about the arrears of commercial rent that have built up during the pandemic, estimated to be as much as £8.5bn. What happens next?
Mandatory arbitration
Mindful of the need to introduce some element of fairness in dealings having consistently favoured tenants during the crisis and consequently, oppressed landlords, the government legislated in November 2021 to bring in a legally-binding and mandatory arbitration process to settle disputes between parties, where this could not be agreed on a consensual basis. The Commercial Rent (Coronavirus) Bill governs this new procedure, under which an independent Arbitrator will consider the dispute and make an award based on the evidence they are given.
Protected rent debt
The Bill creates a new concept by defining the rent arrears, which can be dealt with through this arbitration process, called ‘Protected Rent Debt’. In essence this means the unpaid rent (including service charges, insurance, interest and VAT), which relates to any period during which the tenant’s business was obliged to close because of government regulations, which may have applied between 20th March 2020 and 18th July 2021. It is not rent for the whole of this period, just during the various lockdowns and other local restrictions.
Other rent arrears
Any other rent arrears will be fully exposed to landlord enforcement action as from 25th March 2022. So it is open season on unpaid rent for periods when no national or local lockdown was in force, or that owed by businesses in sectors not forced to close by government restrictions.
What principles must the Arbitrator follow?
Firstly, the award must preserve the viability of the business of the tenant, so far as that is consistent with also preserving the landlord’s solvency. Provided it is consistent with the tenant’s viability, the second principle is that, if a tenant can afford to meet its payment obligations, it should do so in full and without delay.
What information will the Arbitrator take into account?
The Bill contains specific guidance for the Arbitrator, of which the key requirement is to establish whether the tenant is in a position to pay the rent arrears in full immediately, or if a deferred settlement arrangement or a write off of all or part of the arrears is justified.
What this means is that the tenant will have to provide the Arbitrator with comprehensive financial data on their solvency and their cash flow profiles. Because the solvency of the landlord has to be considered, this also applies to them. Somewhat menacingly, the Bill says that any manipulation by a party of its financial affairs is to be disregarded. Equally, the tenant cannot be forced as part of any settlement to restructure or take on additional debt.
What should tenants and landlords be doing now?
Talking
No matter how difficult relations may have become, now is the time for dialogue, even at this late stage. The inherent delays, costs and uncertainties of going down the arbitration route are unlikely to be in the best interests of either party, if it can possibly be avoided. Equally important, there is also the non-protected rent to discuss and deal with.
Preparing financial data
There will be a host of financial data to be gathered and put together in a format that makes it both user-friendly and credible for the Arbitrator. Leaving this until the last minute is a recipe for disaster in the proceedings.
Gaining independent support
This is all unfamiliar territory for entrepreneurs and their management teams and for many landlords. Involving outside experts experienced in these matters will avoid distracting management and bring that vital element of credibility to the evidence presented to the Arbitrator. Calling them in at the outset is key and may even be the catalyst necessary to prompt a pre-arbitration settlement.
Get in touch
If your business is dealing with rent arrears and is struggling to reach a settlement with your landlord, or if you are a landlord with a struggling tenant, Opus is here to help. We has extensive experience of difficult situations like theses. You can contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners.