The Commercial Rent (Coronavirus) Act 2022 (“Act”) came into force on 24 March 2022 cementing a new binding arbitration scheme to deal with Covid-19 commercial rent arrears arising from the closure of non-essential businesses at the height of the pandemic. Together with the introduction of the Act, we have: (i) the statutory guidance on how arbitrators should exercise their functions under Part 2 of the Act; and (ii) the commercial rents code of practice (introduced in 9 November 2021) giving further guidance on the Act and to assist landlords and tenants who remain in dispute with respect to rent arrears linked to the pandemic.
In our previous article on the proposed bill of the Act, we set out how the arbitration process would work and discussed it’s immediate impact: (The Commercial Rent (Coronavirus) Bill: more uncertainty for landlords | Perspectives & Events | Mayer Brown).
The current restrictions preventing a landlord from exercising CRAR, forfeiture and insolvency enforcement have now come to an end (note: restrictions on landlords presenting winding-up petitions will come to an end on 31 March 2022) and are now replaced with a statutory moratorium preventing a landlord from exercising its usual remedies while the application period for arbitration is open, or while a statutory arbitration is in progress, but only in respect of certain ring-fenced rent arrears. Ring-fenced rent arrears are those that were accumulated during the ‘protected period’ – this is from 21 March 2020 to the last day the tenant faced coronavirus restrictions (with tenants in the hospitality and nightclubs business sector having the longest period, ending on 18 July 2021 in England and 7 August 2021 in Wales).
The purpose of the Act is to preserve what would be viable businesses and the jobs that they provide, if they were not forced to close as a result of the covid-19 measures. As such, the new practice code reinforces that tenants who can pay the ring-fenced rent arrears should do so. However, where tenants cannot afford to pay such arrears in full, the intention is that debt recovery should not force viable businesses to cease operating. In this way, the Act seeks to implement a sharing of financial burden between the landlord and tenant in legitimate cases. Whilst the hope is that rent arrears that have not been dealt with by agreement or judgment can finally be resolved by way of binding arbitration, the Act applies in limited circumstances by period and by industry (certain commercial tenants who were forced to close because of government pandemic measures). Additionally, we expect that sensible landlords and tenants will have reached a commercial agreement between themselves. It may be that, for these reasons, only a limited number of cases will actually reach arbitration.
In terms of the arbitration process, where parties have not reached an agreement in relation to the payment of ring-fenced rent arrears, either party has a six-month window from the date of the Act in which to refer the matter to the arbitration scheme. The task of the arbitrator is to decide whether the relevant tenant should pay the ring-fenced rent arrears using principles of business viability and solvency. If the arbitrator determines (having considered appropriate evidence) the tenant's business is not viable or relief from payment will not achieve viability, the arbitrator must dismiss the case in the landlord’s favour. In such a case, the landlord is able to revert to the usual enforcement remedies against the tenant and the tenant itself may also have to consider a formal insolvency process. On the other hand, if an arbitrator determines that the tenant’s business is viable or would become viable if granted certain relief from payment, the arbitrator has discretion to write off some or all of the protected ring-fenced rent arrears, and can also allow the tenant to pay in instalments (during a period of up to two years) and /or freeze or reduce interest charges. Any relief granted to a tenant has to be balanced against any impact an award may have on the solvency of their landlord. It is noteworthy that in addition to cases which have been dismissed in its favour, a landlord can of course exercise its usual remedies in respect of any arrears which are not ring-fenced under the Act i.e. rent arrears incurred before 21 March 2020 and after 18 July 2021 (in England) as well as rent arrears incurred by tenants whose businesses were not forced to close.
In summary, for tenants who genuinely cannot pay and have been unable to reach a resolution thus far, the Act will enable fair scrutiny of their ability to pay whilst being shielded from strong arm tactics of landlords. Conversely, those tenants who may have disingenuously used the expired Covid-19 relief measures restricting landlords’ ability to pursue recovery of rent arrears, can now be forced to the negotiating table and be subjected to a full and frank disclosure of its financial position. Landlords can now pursue tenants for non-ring fenced rent arrears using ordinary enforcement measures, but whether there will be a huge influx of landlords rushing to forfeit commercial leases, remains to be seen. We expect what happens will be dictated by whether it makes commercial sense - will a landlord be able to re-let or will it risk being left with an empty property and potential business rates liability? Whilst the balancing of these issues is not new for landlords, the current market - in light of the pandemic and other world events - continues to be rocky.