Contributors
The Government has published a consultation paper and questionnaire, seeking responses and evidence from the property industry generally as to how negotiations have fared over the pandemic period between commercial landlords and tenants on rescheduling rent liabilities. This is intended to inform possible future legislation to deal with the upcoming end of tenant protection measures on 30 June 2021.
Background
In March 2020, the UK Government announced its plans to provide protection to business tenants in response to the coronavirus pandemic. These protections include:
- a moratorium on forfeiture, preventing landlords from exercising their right to forfeit commercial leases on the basis of non-payment of rent.
- changes to the use of the Commercial Rent Arrears Recovery (CRAR) procedure.
- restrictions on the use of winding-up petitions and statutory demands.
At various stages throughout the pandemic, these protections have been extended. The UK Government previously stipulated that there would be no further extension beyond 31 March 2021, but nonetheless legislated a further extension until 30 June 2021. If that deadline is not extended further, tenants now face an abrupt cut-off point on protection on 30 June 2021. The protective measures were only ever meant to be temporary, but there is now a significant risk for those who have relied on these protections during the pandemic that, following expiration of the protections, their businesses may fail when rent arrears (in many cases of significant amounts) become readily collectable by landlords.
Call for evidence
The Government has re-stated that its position is to support commercial landlords and tenants to agree their own arrangements for paying off debts by way of negotiations. However, that statement alone will not deal with the "cliff-edge" that many tenants see approaching on 30 June 2021 if negotiations have not been successful in resolving rent arrears issues, and the Government is aware that further legislation may be needed so as best to deal with the position after 30 June.
To that end, the Government has now launched a call for evidence on the outcomes of commercial rent negotiations since the start of the pandemic and the Government's restrictions on rent collection. This call is intended to inform further potential legislation that may be needed to ensure a phasing out the restrictions over a period of time, rather than suddenly on 1 July 2021.
This call for evidence takes the form of an online questionnaire. The questionnaire asks general questions about the respondent's business (turnover, employees, nature of trade) and then goes on to ask about rent negotiations during the pandemic. The questionnaire asks for views on the number of landlords and tenants who engage in negotiations and what are the most likely outcomes of negotiations. Other questions ask for views on the effect of the moratorium on forfeiture and the voluntary Code of Practice which was introduced by the Government to facilitate negotiations.
As part of the call for evidence, the Government has set out potential steps it may take after 30 June 2021, and asks businesses for their opinion of each option in turn. The current options are:
- Simply allow the protection measures to expire on 30 June 2021.
- Allow the moratorium on commercial lease forfeiture to lapse on 30 June 2021 but retain the insolvency measures and additional rent arrears amendments to CRAR for a period of time.
- Target existing measures to businesses based on the impact that COVID restrictions have had on their businesses for a limited period of time.
- Encourage increased formal mediation between landlords and tenants.
- Non-binding adjudication between landlords and tenants.
- Binding non-judicial adjudication between landlords and tenants.
All landlords, tenants, lenders, investors and anyone with an interest in commercial property in England are invited to provide their views to the Government and should do so before 11:45pm on 4 May 2021.
The consultation makes clear that this is not the consultation that has been promised by the Government on possible wider reforms to commercial landlord and tenant law, which is awaited later this year, nor is it intended to cover concerns landlords may have over the use of CVAs to alter lease terms and disclaim unprofitable leases.
The consultation also affirms that the Government does not intend to introduce specific financial support to cover commercial rent debts.
Code of practice
In tandem with restrictions on rent arrears enforcement, the Government also published in June 2020 the widely publicised (and in some quarters heavily criticised) voluntary Code of Practice in June 2020. This Code provided guidance and encouragement for both landlords and tenants on how best to reach a negotiated agreement regarding rent arrears.
The Government has now issued an Annex to the Code which should be read alongside it. The Annex proposes the formalised provision of relevant (but not historic) financial and trading information by tenants to landlords in a template form so as to underpin arrears settlement negotiations between the parties. Tenants are asked to provide in Section 1 of the form
- evidence of their historic rent payment record
- details of how turnover has been affected over the pandemic period
- details of rent already paid
- an offer for the settlement of existing arrears and the payment of ongoing future rent.
The landlord is given an opportunity to respond to the offer in Section 2.
As part of the commentary on this new Annex to the Code, the Government has made it clear that they expect parties to have gone through this template process before considering litigation and issuing proceedings at court.
Comment
A "cliff-edge" when the restrictions finally end has not seemed to many to be in the wider interests of the economy as a whole, and this consultation signals the Government's recognition of this. It will be essential, however, to balance the interests of both landlords and tenants in whatever further restrictions are to be put in place after 30 June, and the Government's current thinking in this respect seems to signposted by the remarks in the consultation that:
"Unless landlords and tenants are able to resolve these difficulties in a manner that enables businesses to return to viability as quickly as possible, the country risks further economic harm including the potential for this to contribute to higher levels of unemployment, particularly among young people….the eviction of tenant businesses that have the potential to return to viability will only act to further hollow out our places. Widespread vacancies in commercial property will only lead to premises becoming more difficult to re-let and values will continue to fall. This is not in the best interests of landlords, their tenant businesses, lenders, and investors, nor the economy as a whole."
