Commercial Rent (Coronavirus) Act 2022 - limited protection for commercial tenants affected by the pandemic

Now that CRCA is in force Landlords should be aware of the practical impact the legislation will have on rent recovery. Our real estate, planning and construction team has set out in detail the provisions of CRCA and in particular the various issues landlords should be alive to going forward.

The Act creates a mandatory arbitration scheme to resolve disputes between landlords and tenants relating to pandemic rent arrears. It also continues the prohibitions restricting landlords’ remedies that had been in force during the pandemic, albeit in a more limited way.

This article summarises the scope of the Act, the procedure for the arbitration scheme it creates, and the restrictions on landlords’ remedies. The Act also introduces new measures in relation to insolvency, including bringing winding-up petitions. You can read about the insolvency 

The Act applies to protected rent debts. In brief, a protected rent debt is one consisting of rent or service charge (or interest on rent or service charge) falling due during the protected period under a business tenancy that was adversely affected by coronavirus.

The protected period begins on 21 March 2020. The end date of the protected period is the last date when any part of the business carried on by the tenant at or from the premises, or the date when the premises themselves, were subject to a closure requirement. In most cases, the end date is 18 July 2021 so the Act covers a period of about 16 months.

In the case of non-essential retail, it ended on 12 April 2021. In the case of garden centres, the protected period ended on 13 May 2020. In the case of hotels, restaurants, bars, nightclubs, gyms, theatres, cinemas and large event venues, it ended on 18 July 2021.

Annex A to the code of practice accompanying the Act helpfully sets out the various dates.

A rent debt will only be “protected” if it relates to a period of occupation within the protected period. If any part of the rent debt falls outside of the protected period, it will not be a protected rent debt and will be outside the scope of the Act. 

A business tenancy will have been adversely affected by coronavirus if it was obliged to close the business (or part of it) carried on by the tenant at or from the premises or the premises themselves (or part of them) as a result of coronavirus restrictions. It does not matter if some activities were able to continue, so long as there was an obligation to close some part of the premises or business.

Offices, factories and warehouses, for example, were not required to close and on the face of it therefore are not within the scope of the Act. Landlords of those premises probably do not need to enter into the mandatory arbitration scheme and there are no restrictions on their ability to pursue their tenants for rent arrears.

However, confusion arises where the tenant’s business involves activities that were required to cease during the pandemic. For example, what of a business that leases a storage unit on an industrial estate whose business includes arranging indoor and outdoor events? Is that business carried on “at or from” the premises? These questions are not easily answered by the Act or the related guidance.

Scope

The Act introduces the widely-discussed compulsory arbitration scheme for protected rent debts.

The arbitrator’s role is to determine if there is a protected rent debt and, if so, whether the tenant should be granted relief.

The arbitrator can make an award which covers some or all of the following:

• that the protected rent debt should be written off, in part or in its entirety
• give the tenant time to pay the protected rent debt by instalments - if this is done, the instalments must be paid within 24 months of the award being made
• reduce or write-off any interest payable on the protected debt

A landlord, tenant or guarantor can refer a protected rent debt to arbitration. This must be done within six months of 25 March 2022.

It must also be done at least 28 days before the end of the six month window so the last day for starting arbitration is on or around 26 August 2022.

The Act provides that the referring party must give notice to the other party of their intention.

The arbitrator may dismiss the reference in several situations. These include:

• where the parties have reached an agreement relating to the protected rent debt
• where the claim is out of scope (e.g. no business tenancy, no protected rent debt, tenancy not adversely affected by coronavirus)
• where the arbitrator determines that the tenant’s business is not “viable” (and would not be viable even if the tenant were awarded relief from payment).

The arbitration scheme cannot be used to “undo” or vary agreements already entered into between the parties in relation to protected rent debts.

Where an arbitrator makes an award, the award will vary the lease in relation to the payment of protected rent debt. Therefore, a tenant will not be in breach of the lease by not paying a sum that the arbitrator has written off, or not making a payment before it is due under the award. This protection extends to guarantors and former tenants under authorised guarantee agreements (AGAs).

The arbitrator is subject to stringent rules under the Act in making a final award:

1. If only the applicant makes a formal proposal, then the arbitrator is bound to make an award in the terms of the proposal, provided that is consistent with the principles set out in section 15 of the Act (see below);
2. If both parties make formal proposals, and those are consistent with section 15, the arbitrator is bound to make an award in the terms of the proposal that is the most consistent. If only one proposal aligns with section 15, the arbitrator is bound to follow that proposal;
3. If neither party has made a formal proposal, the arbitrator is at liberty to make an award consistent with the section 15 principles.

Where a party has made a proposal that is not consistent with section 15, they should look at revising it to mitigate the risk of the arbitrator discounting that proposal.

Section 15 introduces the concepts of 'viability' in relation to the tenant’s business, and 'solvency' in relation to the landlord.

Section 15 sets out that:

1. The arbitrator’s award should preserve, or restore and preserve, the viability of the tenant’s business, so far as that is consistent with preserving the solvency of the landlord;
2. Insofar as it is consistent with the above, the tenant should be required to meet its obligations in relation to payment of the protected rent debt in full, and without delay;
3. The arbitrator must disregard any actions taken by either party to manipulate their financial affairs in order to improve their position when considering the viability of the tenant and the solvency of the landlord. This means that if the parties have undertaken a restructuring or re-organisation, that must be disregarded when considering viability and solvency.

The starting point is that the arbitrator’s costs will be split equally between the parties. However, the arbitrator can depart from that position if they think it appropriate.

The arbitrator cannot award legal and other costs, nor can it penalise an unreasonable party through a costs order. The landlord cannot recover costs from the tenant (even if the lease allows it).

The arbitration fees will be set by the approved arbitrators. The Secretary of State has the power to cap the fees if it considers it necessary.

If a landlord has used a tenancy deposit to pay a protected rent debt, it will still be treated as unpaid rent due from the tenant, and can be referred to arbitration (unless the tenant tops the deposit up again).

If the parties have reached an agreement in relation to the payment of a protected rent debt, the tenant will not be able to make a reference to the arbitration scheme. As above, the scheme cannot be used to “undo” agreements already entered into in relation to protected rent debts. If an agreement is entered into and is later breached, the landlord would be able to enforce the agreement in the usual way (subject to any specific restrictions agreed between the parties).  

Landlords will be well aware that since March 2020 there has been a moratorium in effect preventing them from exercising their usual rights to recover rent arrears.

The Act creates a new moratorium from 25 March 2022. This applies for either six months from 25 March 2022, or, if the matter is referred to arbitration, the day on which the arbitration concludes. This moratorium only applies to protected rent debts.

During that time, landlords who are owed a protected rent debt cannot, to facilitate recovery of that debt:

• issue debt proceedings
• use Commercial Rent Arrears Recovery (CRAR)
• enforce a right of re-entry or forfeiture
• draw down on a rent deposit.

Where a landlord receives payment from a tenant, that payment must be allocated to unprotected rent debts (if there are any), unless the tenant specifically confirms otherwise. Landlords are able to pursue enforcement action in relation to unprotected rent debts, so it is important that tenants keep on top of those payments to avoid action being taken.

Claims issued before 10 November 2021

There is an argument that any judgment given between 10 November 2021 and 25 March 2022 cannot be enforced (so far as it relates to a protected rent debt) and that the judgment can instead be referred to arbitration.

Claims issued on or after 10 November 2021

If a claim was issued after 10 November 2021, and a judgment secured before 24 March 2022, the judgment will be subject to the new moratorium and can be referred to the arbitration scheme if the judgment (or part of it) includes a protected rent debt.

If either party makes an application for the protected rent debt to be arbitrated, the court must stay the proceedings to allow the referral to arbitration (or other mechanism) to take place.

Forfeiture

Under the Coronavirus Act 2020, whilst landlords were prevented from forfeiting business leases during the pandemic, nothing they said or did (other than an express waiver in writing) could constitute a waiver of the right to forfeit.

Therefore, landlords who wish to forfeit now for unprotected rent debts should be able to do so safe in the knowledge that they will not have inadvertently lost the right to forfeit through making demands, accepting sums, or otherwise acknowledging the existence of the lease between 26 March 2020 and 25 March 2022.

As of 25 March 2022, landlords are able to pursue forfeiture but must ensure that nothing they do on or after 25 March 2022 could be construed as waiving the right to forfeit.

It is unclear, at this stage, whether the court could order a tenant to pay a protected rent as a condition of granting relief from forfeiture.

Under the Coronavirus Act 2020, superior tenants were afforded protection under the previous moratorium. As of 25 March 2022, landlords are able to forfeit superior leases if the tenant is not in occupation for the purposes of its business, as it will not be a business tenancy. Any sub-tenant will be afforded the usual protections against forfeiture and could apply for relief.

Landlords are prevented from relying on ground (b) of section 30(1) of the 1954 Act (non-payment of rent) if serving a “will oppose” section 25 notice on a tenant, if the rent it seeks to rely on is a protected rent debt.

In a change from the draft Bill, the Act confirms that guarantors benefit from the same protections as tenants in relation to protected rent debts.

The new Act creates a variety of options for landlords, which come with increased importance of checking and scrutinising rent arrears accrued over the past two years before taking any action.

There are various options available to landlords now.

1. Pursue the usual enforcement options as above in relation to unprotected rent debts.
2. Reach an agreement with the tenant or make a referral to the arbitration scheme. An agreement can cover both protected and unprotected rent debts; if an agreement is not reached in relation to unprotected rent debts, the landlord has the other options available to it.
3. Make a referral to arbitration or reach an agreement with the tenant in relation to protected rent debts, or wait until the end of the new moratorium, at which point the usual enforcement options become available again in relation to a protected rent debt.