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Feature: Covid rent arrears scheme brings landlord and tenant relationship into focus

By Kate McCall, partner at Shoosmiths’

The Commercial Rent (Coronavirus) Act 2022 was designed to provide a legislative framework for landlords and tenants to resolve disputes relating to rent arrears that accrued because of commercial premises being required to close during the Covid-19 pandemic.

The Act introduces a binding system of arbitration that landlords or tenants can instigate if unable to agree a negotiated settlement for the waiver of some or all pandemic rent debt.

It was estimated that £7.5bn worth of rent arrears was due across the real estate sector when the arrears arbitration process was first revealed. However, with only months until the scheme’s current cut-off – 23 September 2022 – there is a question over take up.

Weighing it up

One potential reason for the lower engagement we’re seeing with the scheme is due to non-protected debts not being covered by the Act.

This means that extensive work is having to be undertaken to unpick composite accounts – an unwanted distraction for some tenants that are focusing on rebuilding post-pandemic.

There is also the cost of the scheme and arbitration process.

The party making the reference to arbitration has to cover the up-front costs. Where a party is making multiple references to the scheme, for example with regards to several leases, costs can quickly mount up.

Though the arbitrator can provide for some costs to be recovered when an award is made, there may be a delay before they are returned. It is, therefore, critical that before utilising the scheme, both landlords and tenants consider the impact committing capital up front may have on their stability.

The introduction of the scheme was seen as a roadmap back to normality in terms of rent arrears recovery – assisting tenants who couldn’t afford to pay, rather than those that didn’t want to pay as much as they were contracted to.

However, like portfolio tenants, larger landlords also seem cautious about triggering a referral. This may in part stem from a fear that a decision could set a precedent that could be used against them on an estate-wide basis, with major operational and financial implications.

There is also the risk that a referral, which results in a dismissal by the arbitrator on grounds of non-viability, could lead to tenant restructuring or insolvency. In this situation, recovery of some or all of the arbitration fees is remote, so landlords must consider cost-benefit analysis.

Future of the scheme

The more awards published under the scheme, the more transparent the process becomes.

Once landlords and tenants are able to see the type of concessions that are being granted, we may see more, or less, participation under the scheme. It is important to highlight, however, that once the cut-off date – assuming it is not extended by the government – has passed, tenants will no longer have the automatic right to refer the question of whether a rent relief package is appropriate to a third party.

Some landlords may then decide to return to the traditional routes for non-payment of rent. This could involve debt claims, forfeiture, Commercial Rent Arrears Recovery or winding up.

Either way, to be eligible for the scheme, landlords or tenants must follow a pre-referral process that takes a minimum of 28 days. Unless or until this procedure has been completed, a reference to the scheme will likely be rejected – so, should a party want to take this action, the referral process will need to begin no later than August.

Revisiting the landlord and tenant relationship

It’s clear that there are many financial and operational factors for landlords and tenants to consider before engaging with the scheme. Most important, though, is their relationship.

The property market remains volatile, and tenants are voting with their feet. Landlords must recognise this and find a balance between demonstrating to tenants that they cannot ignore contractual rights without consequence and preserving wider commercial relations. If they don’t, there is a risk of alienating partners and creating a void between landlord and tenant.

A perhaps unintended consequence of the scheme then is that it is driving a wave of negotiation over pandemic related rent debt. Deals are being done.

This is being led by the ambition of some landlords and tenants that want to maintain their commercial relationships, with both parties exercising a degree of restraint and aiming to avoid the financial and operational drain of the Act’s binding system of arbitration.

Both landlords and tenants have been significantly impacted by the Covid-19 pandemic. Many are still trying to recover while being buffeted by new economic headwinds. It seems that the introduction of the Act has brought about a level of mutual recognition in this regard, with both parties increasingly choosing to work together on issues such as rent debt.

This is not to say that the scheme does not have an important role to play. Its fundamental principle is clear and fair – a tenant who can afford to pay the rent in full, should do so, and a tenant whose business could be made viable by being relieved of the obligation to repay some or all its pandemic arrears, should be relieved.

It does, however, provide an opportunity for landlords and tenants to revisit their relationships and realise that finding solutions together can not only help alleviate short-term pressures, but also pave the way for a stronger partnership moving forward.