Throughout the last 24 months, businesses have faced unprecedented disruption because of Coronavirus – from waning consumer demand to government-enforced closures.

Arguably, the main burden was (and is) ongoing legal obligations pursuant to leasehold interests in the businesses’ property. Nationwide restrictions led to ceasing trade and resulting rent arrears and other debts, arising from financial liabilities under such leases.

In addition to the grave challenges faced by commercial tenants, landlords have encountered their own problems, in that the usual recourse of forfeiture or forced insolvency proceedings has been placed under a prolonged moratorium.  The ability for a landlord to turn to commercial rent arrears recovery, as set out in the Tribunals Court and Enforcement Act 2007, has also been significantly restricted.

The New Legislation

The current narrative suggests that these restrictions will end from 25 March 2022, with a partial alternative mechanism sought by the Commercial Rent (Coronavirus) Bill (the Bill).

With the infancy of this proposed legislation, both commercial tenants and landlords will likely find themselves wondering:  “What does this mean for us?”  The Bill is mooted to find a middle-ground of protecting the longevity of a tenant’s solvency and seeking to recognise the need to preserve the entitlement of the landlord to its financial income – which may well have a direct impact on the landlord’s own solvency.

What Has Happened Over the Last 18-Months?

Contrary to popular rhetoric, commercial lawyers do not seek out unfortunately contentious events. Throughout the unprecedented pandemic, common sense has fortunately prevailed and many tenants and landlords have reached both formally and informally recorded compromises.  Nonetheless, there will be a substantial number of commercial tenants in rent arrears, with no near-sighted prospect of immediate repayment.

On the basis that the cause of this financial turmoil is unprecedented, there is little to no anticipation of an easy solution within commercial property markets, which itself is driving the unease between tenants and their landlords.

Will There Be Changes in the New Financial Year?

The Bill introduces an arbitration mechanism, dealing with scenarios where tenants and landlords have been unable to reach a compromise on non-payment of existing arrears. It is notable, however, that the function is only available to tenants (and their guarantors) and landlords where the tenant has been impacted by closures enforced at the governmental level. T

he hospitality industry – clubs, holiday parks, hotels, pubs and restaurants etc. seem a “shoe-in”. However, such arbitration will not be available to suffering industries that were not forced to close – such as essential retail or office-based service deliveries – notwithstanding that the pandemic may have severely affected solvency.

Is My Business Included and How Will This Affect Me?

Many tenants and landlords will be wondering who these arbitrators shall be.  Logical anticipation suggests that accountants will be favoured as best-placed to arbitrate, given the need to delicately balance the playing-off of the solvency and long-term viability of both the landlord and tenant.  It is proposed that arbitrators will have the power to write-off arrears entirely – or alternatively, seek to defer payment over a 24-month period.  It is important to note that the term “arrears” will likely extend beyond just unpaid rent and will encompass any unpaid service charges, insurance payments and other due financial contributions – including any VAT chargeable on any of these.

The “protected period” is deemed as 21 March 2020 until the earlier of the final day upon which a business’ premises was fettered by a closure requirement or 18 July 2021.  It is foreseen that any arrears arising within this defined period will be ring-fenced and excluded from enforcement until any arbitration proceedings conclude or the date which is six months from the date upon which the Bill is passed.  The ability of a landlord to bring proceedings, use commercial rent arrears recovery mechanisms or seek forfeiture is therefore likely to remain restricted – such fettering will also relate to a landlord’s ability to dip into any rent deposit or seek to bring insolvency action.

Will the Legislation Apply to My Business and Am I Included?

As with all legislation, several scenarios shall be excluded from landlord restriction.  These include remedies for non-payment under leasehold interests that are not considered “business tenancies” (and commercial tenants will often be unsure as to whether they have one or not, without focused legal advice), there was no apparent Government-sanctioned closure, any of the outstanding financial liabilities arise outside of the protected period or arrears otherwise fall outside of categorisation within the Bill.

The “knee-jerk” requirement for introduction of such a bill, combined with the speed at which approval will be required at Government level, has understandably raised concerns with both tenants and landlords.  The trepidation surrounding identification of suitably qualified arbitrators is perhaps outweighed by the lack of clarity surrounding the scrutiny of both professional costs of the arbitration itself and a standardisation of fair treatment across tenants of varying operational size and solvency.

Can Best Solicitors Help Both Tenant Businesses and Landlords?

At BEST Solicitors, it is acknowledged that both commercial tenant and landlord clients will have significant concerns around their present position, considering the upcoming changes.  Our lawyers have key experience in all areas of contentious and non-contentious commercial property and real estate law.  Enquiries from a commercial tenant and landlord clients are both expected and encouraged over the coming weeks, to ensure that those enquiring parties receive the best legal advice available.

Ian R. Osborn is our Head of Commercial Property and can engage with both tenant and landlord clients in seeking to negotiate amicable settlements regarding leasehold assignments, amendments, surrenders, variations and alternative arrangements.

If negotiations have become more acrimonious or litigious in nature, Thomas Tilbrook, our Head of Civil Litigation, is able to provide concise and focused advice on strategic negotiations and the next steps towards settlement or proceedings.

Blog authored and published by Ian R. Osborn – Head of Commercial Property

** NOTE:  This article is for guidance only and is not to be construed as or relied upon as legal advice.  If you require legal advice tailored to your situation, please contact us to arrange an initial face-to-face or telephone appointment and one of our solicitors will contact you to take more details.