The government has announced that it is extending the ban on commercial evictions until March 2022 – a nine-month extension.
Fearing a wave of business closures and insolvencies in the wake of Covid-19, particularly in the hospitality sector, this temporary support measure was introduced to restrict landlords from forfeiting the lease or using the Commercial Rent Arrears Recovery (CRAS) procedure.
In March 2022, landlords will have been prevented from exercising their usual rights to end a commercial lease and pursue a tenant for rent arrears for two years.
The government also plans to ‘ringfence’ commercial rent arrears that arose due to business closures under coronavirus restrictions. It intends to introduce a new arbitration process that requires landlords and tenants to come to an agreement about rent, such as agreeing longer-term payment plans or even waiving rent.
How will the new landlord and tenant arbitration process work?
We have not been told exactly how the process will work once written into law, but here is what we know at the moment:
- Landlords and tenants will be expected to cooperate to make an agreement about how to handle the unpaid rent arrears.
- Landlords in particular should ‘share the financial burden’ of the pandemic, which could mean accepting rent concessions or agreeing longer-term repayment plans with tenants.
- If Landlords and tenants cannot come to an agreement about ‘ringfenced’ arrears (arrears that arose due to forced business closures during the pandemic), they must attend arbitration.
- Arbitration is an Alternative Dispute Resolution process whereby the parties go before an independent arbitrator who hears all the evidence and makes a decision about the case.
- Arbitrators will be screened to ensure they are neutral.
- The arbitration process will be binding on landlords and tenants – both parties will be legally required to stick to the resulting agreement.
- Tenants are reminded that they should pay rent when and as soon as they are able to – i.e. as soon as they are given the greenlight to reopen.
What does this mean for landlords?
Communities Secretary Robert Jenrick states that the extension and new arbitration process, “strikes the right balance between protecting landlords and also helping businesses most in need, so they are able to reopen when it is safe to do so.”
Landlords are explicitly being asked to share the financial burden of business closures due to the pandemic.
However, many landlords, who may have been supporting their tenants since March 2020, will understandably be dismayed by a further nine-month extension and the suggestion that they cannot recover rent arrears accumulated while tenant businesses were closed in the usual way.
At the same time, the moratorium on some corporate insolvency measures, such as Statutory Demands and Winding Up Petitions, has been extended a further three months to 30 September 20201, meaning landlords’ recovery options are limited even further.
While many landlords will of course be happy to work with viable businesses that are struggling due to the pandemic, there is a concern that the ban is just delaying the inevitable for others. And what about businesses that can afford to keep up with their rent but can get away with not paying while the ban is in place?
It is also unclear at the moment exactly how the new arbitration process will work. Many landlords will not be prepared to waive huge amounts of unpaid rent, so how will the arbitration scheme resolve this? If the tenant insists that they cannot pay, is the goal to force landlords into accepting rent concessions even though the rent is unquestionably due?
One consolation is that arrears accumulated before the pandemic and when the business was allowed to open can presumably be recovered normally as soon as the restrictions on evictions lift.
Do you need advice about an issue with your commercial tenants?
At Preston Redman, we have a dedicated corporate and commercial law team who specialise in commercial landlord & tenant issues.
We have particular expertise advising landlords on a wide range of commercial property issues, from negotiating rent issues to providing advice about regaining possession and corporate insolvency.