The Commercial Rent (Coronavirus) Act 2022 (the Act) came into force on 24 March 2022. The Act applies to commercial property and introduces the concept of “protected rent debt”, being rent arrears that accrued as a result of the forced closure of businesses during the pandemic. It also introduces an arbitration scheme to facilitate agreement between landlords and tenants who are yet to reach settlement on how such rent arrears should be dealt with.
The existing moratorium suspending a landlord’s usual remedies for rent arrears is lifted as a result of the Act, however a further six month moratorium is in place against such protected rent debt with more wide-ranging effect.
In this article, we answer some key questions about the application and effect of the Act.
What tenancies are covered by the Act?
The Act will apply to any lease that constitutes a business tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies. Broadly speaking, this means the Act applies to leases where the tenant is operating a business from the premises whether or not the tenancy is protected by the Landlord and Tenant Act 1954.
What sums under the lease are protected by the Act?
The Act covers rent and service charge (including VAT due on those sums) plus interest.
On what date(s) would the arrears have to have accrued to be protected by the Act?
The Act covers arrears accrued between a period commencing on 21 March 2020 and ending on or before 18 July 2021, as provided for in the Act (the Protected Period). The end date of the Protected Period will vary depending on when businesses in the relevant sector were permitted to re-open again. The Act prescribes the end date for each relevant sector. Arrears of those sums described above that accrued during this period are defined in the Act as “protected rent debt”.
How will protected rent debt be treated under the Act?
Landlord remedies
For a period of six months commencing 24 March 2022 (the Moratorium Period), landlords will be prohibited from exercising the below remedies against tenants in connection with protected rent debt:
- Debt recovery proceedings
- Commercial Rent Arrears Recovery (CRAR)
- Forfeiture
- Drawing down on a rent deposit (in the event a drawdown occurred before the Act was passed, any obligation on a tenant to top up the rent deposit is suspended)
- Presenting a winding up petition against a company tenant (but note this only applies if all of the arrears are protected rent debt); and
- Presenting a bankruptcy petition against an individual tenant.
Arbitration scheme
The Act will also introduce a new arbitration scheme to facilitate agreement between the landlord and tenant about how protected rent debt should be dealt.
Either the landlord or the tenant can make a referral to the scheme within the Moratorium Period.
The party that makes the referral will make a proposal for how the protected rent debt should be dealt. This might include debt write off, a repayment plan or a combination of both. The responding party may make counter-proposals.
The arbitrator will consider both parties’ proposals either at a hearing or on the papers alone. The arbitrator’s decision will be made with reference to the viability of the tenant’s business and what the tenant can afford to pay, whilst considering the landlord’s ability (where reasonable) to suffer any loss.
The arbitrator must make a decision as soon as reasonably practicable or within 14 days of any hearing. The arbitrator’s award is legally binding upon the parties.
What if neither party makes a referral to the arbitration scheme?
If neither party makes a referral during the Moratorium Period then, at the end of that period, the usual landlord remedies referred to above will become available in relation to protected rent debt. With that in mind, it will almost certainly always be in the tenant’s interest to make a referral if it cannot reach agreement with the landlord.
What if proceedings have already been issued against a tenant?
Landlords were not prevented from issuing debt proceedings to recover arrears including protected rent debt during the previous moratorium on enforcement action.
Proceedings issued after 10 November 2021, where judgment has not yet been awarded in respect of protected rent debt, can be stayed on an application by the landlord or the tenant.
If judgment has already been awarded in connection with a protected rent debt, but not yet paid by the tenant, then enforcement of the judgment against the tenant is prohibited. Either party can still apply to the arbitration scheme in this instance, in which case the court’s judgment will be deemed altered so as to be aligned with the arbitrator’s award.
What about arrears that are not protected rent debt?
The Act does not apply to any arrears accrued outside the Protected Period. The usual landlord remedies described above are available to the landlord in this context. Tenants should be aware that, if they have continued to fail to pay rent following the end of the Protected Period for their business, they are at risk of enforcement action being taken against them.
Landlords should be aware that any rent payments made by a tenant should be allocated to arrears falling outside of the Protected Period first. Any payments already applied to arrears that form part of the protected rent debt will be treated as having been applied to arrears outside of that period first. For landlords considering forfeiture for unprotected rent arrears, the effect of this allocation of rent payments may preclude the right to forfeit from arising.
What happens to existing agreements between landlords and tenants?
Existing agreements between landlords and tenants concerning rent arrears whether accrued during the Protected Period or not are unaffected by the Act and so should therefore be followed as previously agreed.
Conclusion
For landlords and tenants who cannot reach agreement for the repayment of COVID-related rent arrears, the arbitration scheme introduced by the Act should be welcomed.
Landlords will be pleased that all of their usual remedies are now available to them in connection with unprotected rent debt at least. Tenants who continue to face financial hardship as a result of the pandemic may be troubled by the renewed prospect of forfeiture. In such situations, landlords and tenants should seek the specific advice of their legal advisers as to the practical and legal steps available to them to mitigate their position.
It otherwise remains to be seen to what extent landlords and tenants make use of the arbitration scheme and to what extent this actually assists those tenants who also have unprotected rent debt for which they may face the usual enforcement action.
For specific advice on your particular situation, whether as a landlord or a tenant, please contact Ian Crowe in our Property Litigation Team.
Key Contacts
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2022.