By Katherine Campbell, head of real estate disputes at Reed Smith
The Government’s recent decision to extend the existing moratorium on forfeiture of commercial leases for non-payment of rent to 25 March 2022 sent shockwaves through the industry. In addition, the use of bailiffs for rent recovery is barred unless there is a staggering 554 days of rent due and owing, whilst the use of statutory demands and winding up petitions for rent arrears is suspended until the end of September 2021.
For many landlords, the extension of these measures is another kick in the teeth from the government. An estimated £6bn of rent is reportedly lying unpaid. If this outstanding amount could only be attributed to hard-pressed businesses severely affected by the pandemic that would be one thing, but it is no secret that some perfectly well-leveraged tenants have jumped on the COVID bandwagon and used the moratoria to their advantage to extract deals from smaller landlords or simply to avoid paying anything at all. It is therefore unsurprising that the British Property Federation is considering taking action against the Government as a result of the extensions.
The government have spoken in terms of “ring-fencing” arrears which have arisen as a result of the pandemic, where landlords will have to come to alternative arrangements with tenants over the debt, referring to periods of forced closure rather than any period during which the tenant’s business was closed. This is helpful, in terms of limiting the period of possible total loss to landlords, but it won’t affect the forfeiture moratorium and it won’t help those genuinely struggling tenants who have already paid or come to binding agreements with landlords for those periods. Again, those tenants that have had the leverage to play the system so far are likely to be the beneficiaries.
To make matters worse in the eyes of many landlords, the government have also announced that legislation will be introduced, ostensibly to help landlords and tenants come to an agreement over arrears, which “could be done by waiving some of the total amount or agreeing a longer-term repayment plan”, but which will involve a mandatory arbitration procedure if agreement cannot be reached.
Whilst details on the proposed legislation have not yet been published, reference has been made to the “Australian approach”. In Australia, a mandatory code of conduct was introduced on 7 April 2020. It provides for waivers and deferrals of rent of up to 100 per cent, dependent upon the reduction in the tenant’s trade during the pandemic and taking into account a subsequent recovery period. The waivers must not be less than 50 per cent of the total reduction in rent, but must also take into account the landlord’s financial ability to provide such waivers. Deferred rent must be paid over the balance of the lease term, but if the balance of the lease term is less than 24 months, the tenant can pay the deferred rent over 24 months, commencing after the end of the pandemic period. If landlords and tenants cannot reach agreement, the matter may be referred by either party to mediation (and then a court process if mediation is unsuccessful) or they may agree to proceed straight to arbitration by an independent arbitrator.
A mandatory statutory dispute resolution procedure for commercial leases will be a massive sea change in the UK. It represents an unprecedented interference in the contractual relationship between landlords and tenants and should be treated extremely seriously by those with the power to implement it. The threat of it may of course have the desired result of bringing about early resolution between landlords and tenants, who have neither the time nor inclination to have their commercial relationship dissected by a third party.
Today, landlords are still able to pursue tenants to recover their rent arrears through the courts and many are doing just that. Two recent cases have been encouraging in their dismissal of “pandemic” defences, but our court system is suffering the effects of the pandemic with understaffing, additional workloads, and lengthy delays. It will be interesting to see how the influx of insolvency cases will be dealt with after 30th September as there will certainly be many waiting in the wings.
