Commercial Rent Update:
Commercial Rent Update: new legislation has come into force which extends protections given to commercial tenants during the pandemic
On the 24 March 2022, The Commercial Rent (Coronavirus) Act 2022 came into force with the intention of extending the protections afforded to commercial tenants during the coronavirus pandemic. The Act will apply to tenancies where the tenant occupies premises for business purposes – whether contracted out of Part 2 of the Landlord and Tenant Act 1954 or not.
In this update, we outline the framework of this legislation and look at the potential impacts.
The Act aims to avoid a mass of insolvencies for those tenants who fell into arrears during the pandemic now that general restrictions on landlords’ enforcement powers have been lifted. The Act does this by ring-fencing certain ‘protected rent debts’ that accrued during a ‘protected period’.
- Protected rent debts refer to any rent, service charge, interest or VAT that fell into arrears as a result of forced closure of whole or part of the tenants business under coronavirus regulations.
- The protected period runs between 21 March 2020 to the earlier of either (1) 18 July 2021 in England and 7 August 2021 in Wales, or (2) the last day the tenants business was subject to forced closure under the applicable coronavirus regulations.
If the landlord and tenant are in dispute about the payment of these protected rent debts, then the Act will allow tenants to seek relief through a new arbitration scheme. Landlords are subject to a moratorium on enforcement of these debts for 6 months from the date the Act came into force (i.e. until 25 Sept 2022) or until the arbitration has concluded (provided this began within 6 months).
This means that a landlord’s entitlement to issue a debt claims is temporarily suspended. Consequently, landlords are unable to enforce rights of forfeiture or re-entry, exercise CRAR or draw down of rent deposits etc. until the moratorium ceases to be in effect.
The arbitration process can be initiated by either party before the end of the 6 month period (i.e. before 25 Sept 2022). The arbitrator will have the power to defer or reduce payment of protected rent debts based on an assessment of the tenant’s viability and the landlord’s solvency; if the tenant does not have enough to pay the arrears, then they are likely to grant a relief provided that the landlord will not be made insolvent.
The Potential Impacts
Fear of the arbitration process should promote genuine negotiation between landlords and tenants; it is costly and uncertain and would inevitably further damage the relationship. However, there is a risk that it will punish landlords who have been sympathetic to their tenants and chosen not to pursue debt claims since lockdown.
There is an incentive for tenants to simply wait until the last moment to initiate arbitration and/or elongate negotiations in the meantime, as it will give them more breathing space and a chance at relief regardless. Landlords therefore have a tactical decision to make – they can wait and hope that the tenant does not apply for arbitration (with a view of pursing enforcement after the moratorium has ended); they can trust that the tenant will enter meaningful negotiations; or they can apply for arbitration now in order to get debt paid sooner, even if this comes at a loss.
If you have any questions or require tailored advice about how this legislation will impact you, then please get in touch with a member of our Property Department.
Written by Tom Spratley – Trainee Solicitor.