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05 Aug 2021

Latest Government announcement on liability for rent arrears

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Yesterday (4 August 2021), the Government released their policy statement on supporting commercial tenants who are in arrears as a result of the Covid-19 pandemic. In simple terms the Government plans to ring-fence rent arrears that accrued during the period of Covid-19 related 'restrictions', require parties to negotiate over those ring-fenced arrears and, if negotiations prove unsuccessful, have a form of mandatory arbitration determine what the tenant should pay towards the ring-fenced arrears and by when. 

The policy statement gives the first insight into how the Government expects this process will work (though it remains quite vague). 

Key takeaways:

  • Obligation to "negotiate in good faith": the Government continues to emphasise that it wants parties to reach negotiated solutions where possible. The voluntary code of practice for such negotiations published in June 2020 is to be revised and given legal force. The Government also makes clear that parties who do not negotiate in "good faith" could be subject to cost penalties by arbitrators.

  • Periods for 'ring-fencing' will be sector/industry specific: the period of arrears to be ring-fenced will vary by industry sector and will relate to the period of time during which that industry was subject to Covid-19 "restrictions". It awaits to be seen what is considered a "restriction". Landlords of office tenants should end up being less affected than landlords of hospitality tenants, with non-essential retail somewhere in between.

  • Framework for arbitration remains unclear: the Government expects landlords of tenants impacted by closures to waive or defer an "appropriate proportion" of those ring-fenced arrears. The policy statement mentions both waivers and deferments. The precise approach remains unclear but it is also clear that the Government expects landlords to "share the financial burden" caused by Covid-19 restrictions. It seems likely landlords will in most cases have to absorb some level of waiver for ring-fenced arrears.

  • Tenants should pay rent going forwards: one piece of good news for landlords is the Government makes clear that tenants should be paying their rent as per their lease from when Covid-19 restrictions were lifted for their industry. Now all Covid-19 restrictions have been lifted in England all tenants should therefore be paying their rent going forwards.

What next for landlords?

The proposed arbitration framework unfortunately remains unclear and vague but this policy statement gives a sense of a direction of travel. Possible strategies for landlords in light of this now include:

  1. Sue for all arrears: no legislation has yet been introduced to provide for ring-fencing (we do not know if the arbitration scheme will take force retrospectively). Legally all rent arrears remain due and owing (regardless of whether they will be ring-fenced in the future) and landlords can issue money claims for them. If judgment is obtained this can be enforced through enforcement officers or other means. Landlords should though bear in mind that they may well be penalised for the costs of the arbitration as suing could be seen as not negotiating in good faith. It is also possible some tenants will seek to stay court proceedings in respect of arrears likely to be ring-fenced, pending the new legislation being introduced. For some tenants though suing may still be the right approach (especially ones who clearly can afford the rent in full).

  2. Negotiate: it is clear that the new arbitration scheme may penalise parties that have not negotiated in 'good faith' over ring-fenced arrears. Landlords should therefore try to proactively negotiate with tenants in respect of arrears that may become ring-fenced.

  3. Pursue arrears that are unlikely to be ring-fenced: the statement makes clear that tenants cannot continue to use Covid-19 as excuse to not pay their rent going forwards. Landlords should be prepared to take action for these arrears (i.e. arrears pre-dating the first lockdown and arrears that accrued after the easing of restrictions for the tenant's industry). It may though be riskier to pursue arrears that could become ring-fenced.

  4. Consider non-monetary breaches: it remains open to landlords to use forfeiture for non-monetary breaches of the lease (subject to the normal rules). Finding another breach and threatening forfeiture provides a powerful option for landlords. The moratorium for forfeiting for arrears of rent remains in place to at least 25 March 2022 (and may well continue to apply for ring-fenced arrears thereafter).

  5. Threaten winding up proceedings from October: the restrictions on winding up petitions and statutory demands have only been extended to 30 September 2021. In theory after then landlords could threaten to wind up tenants if they are in rent arrears (even for those set to be ring-fenced). That would appear to be a loophole though and it seems likely the Government will look to close it. 

What next for tenants?

For tenants the news is more positive. Tenants would be well advised to:

  1. Negotiate: the requirement to negotiate in 'good faith' will work both ways. Tenants who do not engage with their landlords could end up penalised in costs. The Government also makes clear they expect tenants to pay their rent if they can.

  2. Avoid paying arrears likely to 'ring-fenced': it remains to be seen if arrears that accrued during Covid-19 but were paid by tenants can be ring-fenced also. Tenants would be well advised to specify that any rent payments they make should be allocated to arrears that are unlikely to be ring-fenced.

  3. Pay rent going forwards: rent accruing after the lifting of Covid-19 restrictions (in their sector) during 2021 should be paid as normal going forwards.
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