On 4 August 2021, the government published a Policy Paper: Supporting businesses with commercial rent debts: policy statement. This statement updated the government's earlier statement in June 2021 which flagged new legislation to introduce binding arbitration in respect of COVID-related rent arrears.
The salient points from this latest government statement are:
- Legislation will be introduced to "ringfence" rent arrears on commercial premises affected by the pandemic
- The only arrears that will be so "ringfenced" will be rent debt accrued from March 2020 for commercial tenants who have been affected by COVID-19 business closures until restrictions for their sector are removed
- The government expects to be paid (and will not protect by ringfencing) any rent arrears accruing before March 2020 or after relevant restrictions on opening have been lifted
- Tenants who have not been affected by closures and have the means to pay, should pay. However, it is also the government's expectation that landlords should share the financial burden with tenants of COVID closures when able to do so.
- The existing moratorium (until March 2022) on forfeiture for rent arrears and on commercial rent arrears recovery (CRAR) will only apply to ringfenced arrears and not to any other arrears
- Landlords currently cannot use insolvency procedures (statutory demands or winding up petitions) to force payment of rent arrears, up until 30 September 2021. Further measures on the use of insolvency proceedings in respect of rent arrears will be announced in due course
- Prior to the legislation being enacted, the government will update its existing "Code of Practice" from June 2020 , and would expect landlords and tenants to seek to settle rent arrears issues in accordance with this updated Code of Practice.
- A new arbitration system will be introduced by legislation to deal with ringfenced rent arrears that cannot be settled through the use of the new Code of Practice. Such arbitration will be intended as a last resort, and parties may be penalised in costs if they are not shown to have properly engaged with the updated Code of Practice.
Whilst any clarification on the proposed ringfencing and rent arrears arbitration scheme is to be welcomed, there still remains very considerable doubt as to precisely how the scheme will work, pending publication of the full legislation and updated Code of Practice.
Despite the further clarification that has been provided, it is notable that:
- The Policy Paper makes no mention whatsoever of how existing rent arrears debt proceedings in the courts (a rent collection strategy now widely being used by landlords) may or may not be affected by the new scheme
- Both landlord and tenants need to have such guidance as there are very many such rent collection cases going through the courts at the moment relating to the very rents that may in future be ringfenced and made subject to the arbitration scheme
- Tenants will no longer be able to avail themselves of moratorium protection in respect of rent arrears falling due after restrictions have lifted, even if a tenant's trade may still be badly affected through adverse trading conditions as a general result of the pandemic. The understanding that there can be no forfeiture or CRAR for any rent arrears until after March 2022 may have to be revisited in certain cases.
The existing Code of Practice may have had only a small affect in enabling rent arrears cases to be settled. If the proposed arbitration scheme is to be based upon the guidelines in the revised Code of Practice, and if, indeed, access to the arbitration scheme is dependent upon complying first with the Code of Practice, the revised code may prove to be somewhat more effective in producing settlements than the existing one.
If, as seems likely, the government is proposing to "ringfence" rent arrears that may well otherwise be legally due under the terms of relevant leases, this represents a very radical piece of legislation, retrospectively altering contractual rights freely negotiated between commercial parties. The property industry is accordingly entitled to expect the legislation to be robust enough both to withstand potential high-level challenges under the Human Rights Act and more specific scrutiny as to its effectiveness in fairly rewriting the terms of very many commercial leases.