Update: recovery of commercial rent arrears during the COVID-19 pandemic

In our earlier updates on this subject, here and here, we reported that the UK Government was planning to introduce a compulsory arbitration scheme to deal with arrears of rent that fell due during the COVID-19 pandemic. Those plans took a step closer to becoming reality on 4 August 2021, following the release of a full policy statement from the Government, confirming its intention to legislate for the scheme.

Here is a summary of what we know so far:

  • The scheme will involve “ring-fencing” commercial rents that fell due for payment between March 2020 and the lifting of public health restrictions in England and Wales.
  • The scheme will be based on the principle that landlords should share some of the financial burden of the pandemic with their tenants. However, those tenants who fared better during the pandemic and remained able to pay rent will be expected to do so.
  • Both parties will need to contribute towards the cost of the arbitration, if they negotiate in good faith beforehand. The arbitrator will have the power to award costs against any party who acts against the “spirit of the legislative principles”.
  • Rent that fell due before (and which falls due after) the ring-fencing period will be outside the scope of the scheme and be recoverable by landlords.
  • Landlords will be able to evict tenants on the basis of unpaid rent that fell due outside of the ring-fencing period, although the current restrictions on forfeiture will remain in place until 25 March 2022.
  • The restriction on the use of winding-up petitions supported by statutory demands will remain in effect until 30 September 2021. Specific restrictions on the use of insolvency measures by landlords to recover rent arrears will also be announced in due course.

Further information about the scheme is welcome of course. But there’s quite a lot of detail missing from the policy statement.

The most obvious question concerns the all-important concept of ring-fencing. The Government has said it will treat March 2020 as the beginning of the protected period. But when will it end? The relaxation of the public health restrictions was staggered over several months. Some remained in place until as late as July 2021. Assuming that different dates will apply to different industry sectors, this will need to be defined carefully.

Also, the restrictions that were in force in England and Wales between March 2020 and July 2021 were not continuous. There were several independent periods of "lockdown". And so what happens to unpaid rent that fell due in the interim, when many tenants were able to trade?

Another point we’ll be watching with interest is if and how the Government draws a line between tenants who couldn't pay their rent and those that could, yet chose not to. Who will have the burden of proving financial hardship due to the pandemic? The scheme could become weighed down with tactical applications if the threshold criteria are not tight enough.

Comment

The confirmation that the arbitration scheme will be introduced relatively soon raises a number of points for both landlords and tenants to reflect on.

For landlords:

  • There is now a question as to whether starting new court proceedings for arrears of rent which are likely to be ring-fenced is worthwhile. The Government is yet to confirm whether the scheme will be retrospective. As such, some tenants might now respond to a new claim by asking the Court for a stay pending confirmation of whether the scheme will apply to the arrears or not.
  • The option of starting new court proceedings for arrears which are unlikely to be ring-fenced remains available. As mentioned above, it is difficult to assess how the Government will define the end of the ring-fencing period! Even so, it is reasonable to conclude that any rent and other sums falling due after 19 July 2021 (when the last of the remaining restrictions were lifted) will be excluded from the scheme.
  • Landlords should consider taking active steps to engage with tenants on the issue of exactly why specific payments of rent have not been made. One of the underlying principles of the scheme is that tenants who can pay their rent, should pay their rent. If there is reasonable doubt about the tenant’s claim to be unable to do so, it may be possible to challenge a later attempt to take part in the scheme.

For tenants:

  • Tenants are likely to want to contact landlords, explain that their arrears of rent are likely to be ring-fenced, and ask for any pending enforcement action to be postponed until details the arbitration scheme are available.
  • But tenants should do more and give a full and transparent explanation of why payment was not possible. This is consistent with the Government’s expectation of open dialogue and negotiation. It should also help to avoid negative assumptions of an ability to pay the rent due regardless of the pandemic.
  • If already subject to ongoing court proceedings for arrears of rent that are likely to fall within the ring-fencing period, tenants could consider the merits of applying to the court for a stay of the claim on the basis of the pending introduction of the scheme.
 

We expect the Government will release more details about the scheme soon and we’ll be publishing further updates on this important subject as soon as it does.

If you have any further questions about the Government’s proposals, or would like advice on practical steps you can take to resolve any issues relating to non-payment of rent in the meantime, please contact Adam Osiek

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