Landlords and tenants: Government issues a new policy on ‘ringfencing’ rent debt accrued during the pandemic closures.
17th August 2021
On 4 August 2021, the UK Government updated their policy on supporting businesses with commercial rent debts. The Government says the aim is to ‘provide the breathing space needed’ for negotiations between tenants and landlords as they try to resolve the issue of £7.5 billion of commercial rent that is in arrears, according to estimates by the British Property Federation.
Ringfencing of rent debt accrued by businesses affected by enforced pandemic closures
The government plans to bring in legislation that will ‘ringfence’ rent debt accrued during the pandemic by businesses affected by enforced closures. This will separate this debt from the rest of the lease, and landlords will be expected to make allowances for this debt and share the financial burden of Covid-19 with their tenants. The period of arrears to be ring-fenced will vary by industry sector and will relate to the period of time during which that industry was subject to Covid-19 “restrictions”.
Revised Code of Practice and arbitration
The government has stipulated a process of binding arbitration should be undertaken between landlords and tenants for situations where the parties cannot reach an agreement. The government is entrusting that most landlords and tenants will be able to come to some form of resolution using a revised Code of Practice (yet to be published), that will facilitate negotiations between parties and be given legal force. The current voluntary Code of Practice, which was published in June 2020, was designed to encourage commercial tenants and landlords to work together to protect viable businesses.
Section 82 of the Coronavirus Act 2020, which prevents landlords of commercial properties from being able to evict tenants for the non-payment of rent, will continue until 25 March 2022, (unless legislation is passed ahead of this), in order to provide sufficient time for this new process to be put in place. The use of Commercial Rent Arrears Recovery (CRAR), which normally gives landlords the ability to seize goods owned by the tenant in lieu of rent owed unless the tenant has more than 554 days’ worth of rent arrears, has also been restricted until this date.
Restrictions on winding up petitions and statutory demands
The Government has also extended the restrictions against serving a winding-up petition on the basis of a statutory demand implemented through the Corporate Insolvency and Governance Act 2020 until 30 September 2021. The Government is further restricting the issue of statutory demands and winding up petitions against a tenant company for a further 3 months from 1 July 2021 where the tenant is unable to pay its debts due to the impact of Coronavirus.
Tenants with means to pay must do so
The Government is clear that those tenants who have not been affected by closures and who have the means to pay should pay any monies due to landlords. Additionally, the government expects commercial tenants to begin paying rent as per their lease from the point of restrictions being lifted for their sector. In the recent case of Bank of New York Mellon v Sports Direct and others, the High Court has rejected arguments put forward by large commercial tenants (Mecca Bingo, Sports Direct and Cine-UK) which sought to justify withholding rent in light of the pandemic.
The High Court held that the Code of Conduct provided no authority for rent to be withheld and does not affect the contractual obligations between the parties. A contract or lease is either frustrated (and cannot be performed) or it is not. There is no such concept in law as “temporary frustration”.
Eviction and court claims
This means that landlords will be able to evict tenants for the non-payment of rent prior to March 2020 and after the end of restrictions for their sector and those who have not been affected by business closures during this period.
Legally all rent arrears remain due and owing (regardless of whether they will be ring-fenced in the future) and landlords can issue money claims for them. If judgment is obtained this can be enforced through enforcement officers or other means. Landlords should though bear in mind that they may well be penalised for the costs of the arbitration as the new scheme may punish parties that have not negotiated in ‘good faith’ over ring-fenced arrears. Some tenants may also try to delay court proceedings regarding debt that may be ‘ringfenced’ until the new legislation comes into effect.
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The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.