The real estate sector has arguably been the most directly interfered with by the UK Government through the COVID-19 crisis, further to the suspension of much of the legislative framework for meaningful enforcement of rent arrears. This raises not only an economic issue but also a legal issue. Which creditors should be paid and how much? Do the current real estate and restructuring ecosystems provide sufficient tools or will the Government need to interfere further? We look at the real estate reliefs in isolation here but argue that these reliefs cannot be divorced from suspended liability for wrongful trading and other current levers that the Government is using to support businesses.
30 June 2021 is currently the end date for certain COVID-19 reliefs and is fast approaching; however, the Government is yet to announce any plans for an extension or gradual easing of these reliefs (as it has done in the past when previous deadlines have approached). Certain reliefs specifically restrict commercial landlords’ ability to collect rent arrears and with an estimated £6 billion owed to commercial property landlords as a result of the pandemic1, the Royal Institution of Chartered Surveyors has warned of “dysfunctionality in the commercial property market” and a “tsunami of cases” in the English Courts2.
Commercial Rents Consultation
On 6 April 2021, the Ministry of Housing, Communities and Local Government launched a call for evidence (the consultation) in respect of certain COVID-19 reliefs relating to commercial rents to understand landlords and tenants’ response to the accumulation of rent arrears and the current reliefs. The objective of the consultation was stated as informing government policy on the exit from the existing reliefs and on any requirement for additional measures in order to preserve viable businesses. The consultation closed on 4 May 2021 and we discuss the consultation in further detail in our alert here.
The consultation focuses on the following reliefs:
- Moratorium on lease forfeiture for unpaid rent - Section 82 of the Coronavirus Act 2020 provides that a landlord’s right of re-entry or forfeiture under a relevant business tenancy for non-payment of rent may not be enforced, by action or otherwise, during the relevant period, which began on 1 March 2020.
- Restriction on use of commercial rent arrears recovery (CRAR) procedure – Landlords are restricted from using CRAR unless a certain number of days’ rent is due. Pre-COVID-19, this amount was seven days’ rent; during the pandemic, this was initially increased to 90 days’ rent by the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 and there have been a number of subsequent increases to this time period, including an extension to 554 days’ unpaid rent on 24 June 2021.
Without any intervention, these reliefs will end on 30 June 2021 and landlords will be entitled to pursue accumulated rent arrears by forfeiture and use the commercial rent arrears recovery procedure. The impact of this, alongside the simultaneous lifting of the restriction on the use of an unsatisfied statutory demand for non-payment of rent to present a winding-up petition and the re-introduction of liability for wrongful trading, is bound to lead to increased stress and business failure.
Consultation Exit Options
The consultation states that the Government will consider “both regulatory and legislative options to protect viable businesses and jobs”. The options under consideration can be split into two themes and are summarised below.
- What should happen to the commercial rent reliefs currently in place?
- Allow measures to lapse on 30 June 2021.
- Allow the moratorium on commercial lease forfeiture to lapse on 30 June 2021 to give landlords the option of eviction on a lease by lease basis but retain the insolvency measures and additional rent arrears amendments to CRAR for a period of time.
- Keep measures for those businesses most affected by COVID-19 restrictions for a limited period of time and lift measures for all other businesses, restoring landlords’ powers to pursue rent arrears for sectors less affected by the pandemic and associated lockdowns.
- How can landlords and tenants resolve their rent arrears disputes out-of-court?
- Increased formal mediation.
- Non-binding adjudication in accordance with guidelines for determination of disputes (to be issued). Adjudicators will need to be members of an accredited adjudication or mediation professional body, recognised by the Government.
- Binding non-judicial adjudication, introduced by legislation.
In response to the consultation, certain major players in the property sector have called for a separation in the treatment of rent arrears accumulated prior to 30 June 2021 and those incurred after 30 June 2021. The proposal put forward by a number of respondents is that rental arrears owed from March 2020 to June 2021 should be ring fenced until 31 December 2021, by which time either an agreement on rental arrears must be reached between landlords and tenants or the dispute will be settled by binding adjudication.
The Code of Practice for commercial property relationships (the Code), which contains voluntary guidance for landlords and tenants in reaching solutions on challenges faced during the pandemic, presumably is intended to be the starting point for the guidelines and/or legislation noted in the consultation. The effectiveness of a voluntary code when push comes to shove is really in doubt in light of the recent High Court decision in Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others, that there is no requirement for landlords to follow the Code prior to making an application to the Court to recover rent arrears, and given that 72% of the Property Litigation Association’s members responding to the consultation considered the Code to be ineffective3. The introduction of useful, detailed guidelines and/or legislation, which contain the necessary input from landlords and tenants and can be easily and consistently interpreted by mediators and adjudicators is crucial for effective out-of-court dispute resolution. The preparation and introduction of this seems a time-consuming and complex task to complete in the next few weeks.
In the meantime, some commercial landlords have indicated they are not willing to wait for the Government to consider the relief exit options and have successfully utilised their existing powers to pursue summary judgments for unpaid rent. The High Court ordered tenants (including certain venues of Sports Direct, Mecca Bingo and Cineworld), in Commerz Real Investmentgesellschaft MbH v TFS Stores Ltd and Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others, to pay outstanding rent arrears, rejecting various arguments put forward by the tenants in respect of the Code, rent cesser provisions, temporary frustration and business interruption insurance. We discuss this recovery avenue, the tenants’ objections and the court’s reasoning in our recent update.
More Restructurings on the Horizon
The consultation considers the landlord and tenant reliefs for commercial rent arrears in a vacuum and intentionally ignores other government reliefs (such as the restriction on the use of winding-up petitions for rent arrears, which the consultation notes complements the other reliefs but is not being considered, and the freeze on liability for wrongful trading) which are also due to end on 30 June 2021.
The real estate sector is also at the sharp end of developments on company voluntary arrangements (CVAs) and the new Part 26A Restructuring Plans. There have been a flurry of cases in this area and the English Courts have provided some clarification on how real estate relationships and legal relations will be treated in CVAs, restructuring plans and schemes of arrangement (see our recent updates on the Virgin Active Restructuring Plan and the New Look CVA.
The real question is whether we are heading for a cliff edge or further can kicking. Either option is fraught with challenges but a middle ground is very difficult unless you are able to deal with all creditors in one go. We look forward to the Government publishing their response to the consultation, over the coming weeks.
1 As reported by the Financial Times, “ UK retailers set out plan to tackle £3bn in rent arrears”, 6 May 2021, available at: https://www.ft.com/content/b115a910-c07b-4c1d-9c65-e015507a98fc
3 Property Litigation, “Property Litigation Association Response on Commercial Rents and COVID 19: A Call for Evidence”, May 2021, available at: http://41todw2i37w9c74zg3ndz7xp-wpengine.netdna-ssl.com/wp-content/uploads/2021/05/Response-on-Commercial-Rents-and-Covid-19-A-Call-for-Evidence.pdf