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