Can commercial rent debts as a result of the pandemic now be recovered?
In April 2020, the Government announced measures to protect the UK high street from aggressive rent collection and closure in respect of commercial property. Two years later, the measures have been relaxed but strict statutory guidance remains in place for “protected” arrears.
The position is governed by the Commercial Rent (Coronavirus) Act 2022. It protects the recovery of rent arrears that accrued during the pandemic for certain businesses. The Act stipulates as follows:
- if a tenant was subject to compulsory closure by coronavirus regulations, then arrears accrued during the relevant period of restrictions are protected.
- if a tenant was not subject to any compulsory closures (e.g. essential retail shops), the Act plays no part in resolving any outstanding arrears .
What arrears are protected and what is the relevant period?
If the tenant had no option but to close its business operating from a commercial premises as a result of Covid-19, and is in rent arrears, the arrears are ring fenced. The Landlord can only seek the recovery of rent arrears from the Tenant under particular circumstances.
There are two conditions that must be satisfied for arrears to be ring fenced:
- Firstly, the Tenant’s business must have been adversely affected by the coronavirus. The business must have been legally forced to close between 21 March 2020 and 18 July 2021 (in England) or 7 August 2021 (in Wales). This condition applies even if the Tenant was only required to close part of their premises. Businesses such as pharmacies and essential retail therefore do not fall under this bracket and are not afforded protection under the Act.
- Secondly, the arrears must have accrued within the “relevant period” which is between 21 March 2020 and ends on the last day that the business was required to close or subject to specific restrictions. Specific restrictions can include the controlled obligations on a café or restaurant as to how to operate. E.g. The restrictions required reduced table numbers and a requirement to be seated whilst eating in cafes and restaurants. In this case, the protected period runs until these restrictions ended on 18 July 2021.
Any arrears that fall within the categories above are ring fenced. The Landlord and Tenant must seek to agree how to deal with the ring fenced arrears.
Under the Act, if an amicable agreement cannot be reached, the Landlord or Tenant may refer the matter to an arbitrator by 24 September 2022.
The Arbitrator will decide whether to write off or reduce the debt, or to allow the Tenant more time to pay the debt, up to an extension of 24 months. The Arbitrator’s decision will be final and binding on all parties.
The Arbitrator will take in to account various factors to include the Landlord’s solvency and Tenant’s viability and affordability. The Arbitrator should seek to balance the interests of the Landlord and Tenant.
Whilst the Arbitrator’s decision is final, there are limited circumstances under which either party can appeal, such appeal must be within 28 days.
Therefore, whilst the easing of the restrictions aids landlords in the recovery of rent arrears, the conditions imposed are still restrictive and protective of tenants. Landlords can only recover ring fenced arrears via the arbitration process and, only once the arbitration has passed.
In order to avoid the arbitration process and associated costs, it is sensible for both landlords and tenants to maintain an open dialogue to reach an amicable agreement which eliminates the need for protracted litigation, hostility, and breakdowns of relationships in a challenging commercial market.