On 9 November 2021, the Commercial Rent (Coronavirus) Bill (the Bill) was introduced to Parliament.
The intention is that the Bill will be passed by 25 March 2022, in line with the expiry date of the current forfeiture moratorium, which we discussed in our previous article. The Bill is still only in draft form and so amendments are likely before it is enacted.
What will the Bill apply to?
It will only apply to commercial rent arrears (which includes service charges and interest) accrued when businesses or relevant premises were "adversely affected" by coronavirus ("the protected rent debt"), and attributable to a period of occupation by the tenant during the so-called "protected period". Broadly, the "protected period" began on 21 March 2020 and ended on 18 July 2021 (in England), and 7 August 2021 (in Wales), although the end date of the protected period will vary, depending on the types of businesses affected.
The Bill creates a protected rent debt in relation to business tenants where arrears were incurred as a result of the business, or premises, being required to close as a result of the coronavirus restrictions.
The Bill creates a statutory arbitration process, proposed to be effective from 25 March 2022, for landlords and tenants of business premises in England and Wales who have not already reached an agreement on rent arrears. An application to refer a matter to arbitration will need to be made within six months from the date the Bill is enacted. If an application to refer the matter to arbitration is not made within that six month period, a landlord will be able to revert back to the usual remedies to recover the arrears.
The arbitrator will have wide-ranging powers; they can write off the whole or part of a protected rent debt, order that the tenant has time to pay the debt, or pay by instalments, and can reduce any interest due, potentially to zero. The Bill suggests the arbitrator must balance the solvency of the landlord against the financial viability of the tenant – so evidence of those facts will need to be available. That said, the Bill is not intended to be a mechanism to re-negotiate agreements already reached between landlords and tenants and so any compromises reached before the Bill is passed will not be affected.
Additionally, the Bill is accompanied by a new draft Code of Practice intended to provide non-statutory guidance on the approach the parties should take in negotiating the protected rent debt and the arbitration process generally.
What other effect does the Bill have?
The Bill limits landlords' remedies in relation to arrears accrued during the protected period, or where the timeframe for binding arbitration has passed. In particular, whilst the arbitration process is ongoing, a landlord cannot pursue other remedies. This is to ensure that arbitration is given priority. Equally, there are restrictions on tenants initiating some insolvency procedures during the arbitration.
The various restrictions already in place on recovering rent arrears continue to apply to rent arrears accrued during the protected period, including the existing forfeiture moratorium, the prohibition on winding-up petitions, and the restrictions on using Commercial Rent Arrears Recovery (CRAR).
Before the Bill receives Royal Assent (from 10 November 2021)
Landlords' only option to recover rent arrears accrued during the pandemic has been to issue debt claims. If enacted as drafted, any debt claim initiated on or after 10 November 2021, but before the Bill comes into force, can be stayed, if a stay is applied for, to allow the matter to be resolved by statutory arbitration.
If a judgment is given in respect of a claim for a protected rent debt and the claim was issued after 10 November 2021, a landlord will not be able to enforce the judgment because the judgment could still be referred to arbitration under the Bill. This means that the judgment could be altered.
If a landlord draws down on a rent deposit to settle a protected rent debt, a tenant will not be required to 'top up' the deposit, as it might otherwise have had to do. Any sums drawn down from a rent deposit to part-pay or pay a protected rent debt will be treated as unpaid, and can still be referred to arbitration.
There is a possibility that a tenant may owe its landlord protected and unprotected rent debts. If that is the case, a landlord cannot deliberately appropriate any payments made by the tenant to the protected rent debt (unless the tenant expressly confirms that this can be done). Any payments made should be appropriated to the unprotected rent debt.
After the Bill receives Royal Assent (likely from 25 March 2022)
The Bill will create a "moratorium period". This will be effective from the date the Bill becomes law until either (a) the last date the matter could have been referred to arbitration (if it was not so referred) or (b) the date on which arbitration is concluded.
During that period, landlords will be unable to initiate court, CRAR or forfeiture proceedings based on the protected rent debt. Landlords will only be able to negotiate with their tenants, or refer the matter to arbitration during the moratorium period.
Effect on insolvency procedures
Perhaps unsurprisingly, the Bill imposes a moratorium on certain insolvency procedures, specifically bankruptcy and winding-up petitions. This makes sense, because it would defeat the point of the arbitration process if it could be interrupted by the landlord issuing a bankruptcy or winding-up petition.
Certainly in terms of winding-up petitions, landlords will be familiar with the current restrictions on pursuing this route (see previous blog here). The Bill essentially extends these rules from the current expiry date (31 March 2022) to the end of the moratorium period.
However, it is important to note that bankruptcy petitions have been brought into the fold. Until now, they had not been included in the various pieces of coronavirus legislation. For the period of 10 November until the end of the moratorium period landlords will not be able to obtain bankruptcy orders against defaulting tenants, and any orders made during this time which would have otherwise been caught by the legislation will be void. Given the relatively low number of creditors' bankruptcy petitions in recent months (see the official figures available on the Insolvency Service website), it seems landlords (and creditors generally) have thus far not pursued their debts via the bankruptcy process. It will be interesting to see whether the procedures outlined in the Bill will have any real effect on landlords taking enforcement action against individuals.
Bad news for landlords?
Whilst landlords may be frustrated by yet another piece of legislation that prevents them taking enforcement action in respect of overdue rents, it should be borne in mind that the moratorium period as currently drafted (and therefore subject to change) is not indefinite and, if the timetable for the arbitration process remains as proposed, the arbitration hearing will take place 14 days after the request is received by the arbitrator (subject to any extension agreed by the parties or made by the arbitrator). Therefore if the arbitration is unsuccessful it may simply be a case of enforcement options being delayed rather than prohibited entirely.
Russell-Cooke advises landlords and tenants on all matters of rent and debt recovery. If you would like more information on this topic please contact Harriet Allsop, David Fendt, or anyone from the real estate disputes and insolvency teams.