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18 Jun 2021

The rent arrears rollercoaster continues: extended restrictions and new obligations – what can landlords do now?


The Government has announced further measures to help commercial tenants who are in arrears as a result of the Covid-19 pandemic, seemingly without much regard for the difficulties also suffered by landlords. Below we explain the latest measures and where this leaves landlords.

The headlines are:

  1. In the most significant new development, there is to be a "ring-fencing" of arrears built up by businesses affected by pandemic trading restrictions. Landlords are expected to share the pain by considering rent reductions or payment plans. If the parties cannot agree how to deal with the arrears, there is to be a new mandatory and binding arbitration procedure. Our preliminary thoughts on this follow, although many details are currently unclear.
  2. The ban on forfeiting all commercial leases for non-payment of rent continues until 25 March 2022.
  3. Until 25 March 2022, it will remain the case that 554 days' (approx. 6 quarters') rent needs to remain unpaid for a landlord to exercise CRAR. However, that 554 day period is not being further extended. That is the length of time between 25 March 2020 and 28 September 2021, so a tenant which has paid no rent since the start of the pandemic will need to start paying rent again from this September's quarter to avoid CRAR.
  4. Statutory demands and winding-up petitions against companies remain banned until 1 October 2021, unless a landlord can prove that the company would have been insolvent even without the pandemic.

The Government continues to urge that businesses that can afford to pay their rent should do so, but the above restrictions mean that it will be challenging to enforce this in practice. We set out below the remaining options.

What is the new ringfencing and arbitration procedure and how does it affect recovery of rent?

The wording of the recent announcement suggests that ringfencing and arbitration procedure appears intended only to apply where the tenant was forced to close during the pandemic. If so, questions remain as to whether the protection is intended to cover all rent since March 2020 or just the specific periods of mandatory closure, and how it will apply where businesses have been able to partially trade (e.g. by providing takeaway services instead of eat-in) or been able to trade in some parts of the UK but not others. It is also possible that the legislation when introduced may cover a broader set of tenants, so landlords will have to wait and see. 

Details of how the new arbitration procedure will work are not yet clear, but given the Government's emphasis that tenants who can afford to pay should do so, we would expect it to involve analysis of the tenant's ability to pay. At this stage all that we know is that the procedure is intended to be binding on both parties and to deal with arrears "fairly and with finality". It appears it will involve an "approved" private arbitrator acting under a prescribed legal procedure (which is to be set out in a future Act of Parliament), with power to impose arrears reductions and payment plans following representations from both parties. We hope that the process will be clearer than the current Code of Practice. We expect appeal rights will be limited, as is usually the case with arbitration.

Both the British Retail Consortium and British Property Federation had advocated for versions of ringfencing of pandemic arrears, so it is unsurprising the Government has plumped for this option, though the devil will be in the detail.

On the positive side:

  • it appears that the ringfencing and arbitration procedure will only apply to arrears accrued by relevant tenants during the pandemic period - it will not apply to pre-March 2020 arrears, or to arrears arising after restrictions are lifted
  • tenants who can afford to pay are likely to have to pay in full

Impact of the new procedure on court proceedings

For the time being, there is no change and landlords can still threaten and pursue County Court or High Court debt claims. The courts have recently found in favour of landlords on a number of arguments put forward by tenants and awarded summary judgment on arrears claims.

However, we would expect the new legislation to include provisions preventing landlords from circumventing the ringfencing/arbitration procedure. Landlords may therefore wish to consider whether it is worth the cost of starting new claims now for pandemic arrears.

However, our view is that:

  • for "can pay, won't pay" tenants, as well as solvent guarantors, court proceedings will still in most cases be the best option, as they focus minds by increasing the immediate costs risk;
  • court proceedings also remain a good option for pre-March 2020 and future arrears.

Other options in addition to court proceedings

Landlords do still have some other options left:

  1. Serve a section 146 notice and forfeit for a non-rent breach of covenant (if there is one) then seek to negotiate a settlement involving payment of arrears. This is worth pursuing if you think the tenant wants to keep the property and you are willing to take the risk of having an empty unit if they do not contest it.
  2. Bring winding up proceedings against a corporate tenant or guarantor from 1 October 2021 (assuming this deadline is not extended).
  3. Bring insolvency proceedings against an individual tenant or guarantor, a partnership or a foreign company in the usual way (no restrictions apply to this).
  4. If your tenant owes 554 days of arrears, pursue CRAR (only worth doing if it has assets). Also, if your tenant owes 554 days of arrears and there is a sub-tenant, you can serve a "section 81 notice" on the sub-tenant requiring them to pay future rent to you directly.
  5. Pursue a guarantor.
  6. Pursue a former tenant/its guarantor where liable, (that is for pre-1996 leases or where there is an AGA/GAGA). NB you must serve a "section 17 notice" on a former tenant/its guarantor within 6 months of the rent falling due else you will lose the right to pursue them for that rent. 
  7. Draw down on rent deposits (as a last resort).

Obviously, to the extent that the ringfencing/arbitration procedure results in a reduction in the amount payable for the pandemic period, landlords will only be able to recover that reduced amount via one of the above options.

Final thoughts

Landlords should keep in mind the increasing tendency of even seemingly viable businesses to use insolvency procedures such as Part 26A restructuring plans, pre-pack administrations and CVAs to offload onerous debts. These give tenants further breathing space by restricting creditor action. It is thus well worth investigating a tenant's financial circumstances and any rumours of debt restructuring before taking legal action to recover arrears.

While the legal obligations of landlords and tenants remain unchanged, the new arbitration procedure will undoubtedly change the landscape of the landlord/tenant relationship when it comes to existing rent arrears. Where the balance falls remains to be seen, but what is not in doubt is that reaching a deal remains key if landlords and tenants wish to avoid significant costs in dealing with pandemic-period rent arrears.