Mandatory arbitration process unveiled for commercial rent arrears

Othman — Thu, 28 Jul 2022 14:59:25 +0000

The government introduced its long awaited Commercial Rent (Coronavirus) Bill (“the Bill”) and Code of Practice (“the Code”) on 9th November 2021 for issues relating to commercial rent arrears as a result of the pandemic.

At the beginning of the pandemic, in order to protect businesses forced to close during the pandemic, the government imposed a moratorium on commercial landlords evicting commercial tenants who were unable to pay their rent.

Alongside, restrictions stopped landlords seizing goods in lieu of rent, and businesses in rent arrears were protected from insolvency proceedings by their landlord.

The Bill and Code apply to all commercial leases held by businesses with rent arrears caused by the impact of the pandemic within a ring-fenced period and apply across the United Kingdom.

The main purpose of the Bill is an introduction of statutory arbitration between landlords and tenants in relation to a debt of rent arrears. “Rent” is defined in the Bill as any amount payable by the tenant to the landlord and includes not only the rent but also service charges and interest on any unpaid amount.

This is all focused on supporting the wider economy by encouraging landlords to look at the longer-term benefits. Landlords are being encouraged to reach a negotiated settlement, rather than issue proceedings, if that will help protect the viability of the tenant’s business, but this isn’t a blank cheque for tenants wanting to withhold rent on commercial premises: if they are able to pay, they are expected to do so.

Also, it relates to specific ring-fenced periods and sectors. Where a business was able to continue trading, such as pharmacies, they will not be covered by the proposed legislation, although each situation will be judged on a business-by-business basis, as not all tenants will fit neatly into the sector-related time restrictions outlined in the code.

Arbitration will apply only to arrears which relate to periods of mandated closure, meaning that where there has been any gap in payment it is important that landlord and tenant are clear about the period that any subsequent rental payment relates to.

If a date within the ring-fenced period is not specified for any such payment, then it will be treated as outside the scope of the arbitration process. However, the government is encouraging use of the Code by landlords in resolving all rent arrears, whether or not they fall inside the scope for arbitration, rather than by issuing proceedings.

The Commercial Rent (Coronavirus) Bill will formalise the code of conduct by setting out a binding arbitration process for rent arrears accrued during the pandemic where tenants are unable to reach a negotiated agreement with the landlord.

To allow time for the legislation to be introduced, protection from eviction for commercial rent arrears will remain in place until 25 March 2022.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.

For more information, or assistance and advice please call 01992 300333 or visit longmores.law

About the Author
Polja Atkins is an Associate of the Chartered Institute of Legal Executives (CILEx) specialising in leasehold enfranchisement and property disputes. Polja has developed her niche in lease extensions and collective enfranchisement and is now a go-to legal advisor for freehold companies, management companies, individual landlords and tenants looking for swift, accurate advice and assistance resolving disputes.

COVID-19 and commercial leases

Othman — Sun, 10 Jan 2021 16:43:16 +0000

Covid- 19 has created some significant issues for commercial landlords. Rachael Spalton at Longmores Solicitors gives some suggestions on how to resolve them.

My tenant has asked me to reduce the rent. Should I agree?

You’re under no obligation to agree to reduce the rent. A tenant’s requirement to pay rent continues, even if they cannot occupy due to the pandemic.

The Covid-19 crisis has seen the government introduce a voluntary Code of Practice for Commercial Property Relationships, which encourages landlords and tenants to work together to alleviate its impact. While the Code does not change the legal relationship between the landlord and tenant, temporary rent arrangements between them may be needed – such as rent holidays or reduced rent. Be aware that the Code applies until 24 June 2021.

If your tenant requests a rent reduction, they should be clear as to why they need It and also provide financial evidence. As a landlord, if you feel unable to agree concessions, make sure you explain why. However, if you do decide to reduce rent, you should document this in a side letter.

What do I need to consider when agreeing to a side letter?

The duration of the concession. If the rent concession includes other rents under the lease (such as insurance payments and service charge). And if there will be an impact on rent review.

Make sure you consider if any other consent is required:

If your property is mortgaged, you may need additional approval from the lender.
If there’s a superior landlord above you, check if their support is needed.

It may be worth getting legal advice on other options specific to your circumstances.

My tenant has stopped paying rent, can I deduct rent payments from their rent deposit?

If there is a rent deposit in place, you may deduct the outstanding payments, provided the document governing the deposit permits it. However, the Code suggests tenants do not need to top up the deposit until it is ‘reasonable and realistic’ for them to do so. And, if your tenant becomes insolvent, there may be restrictions on your ability to draw funds from the deposit.

Can I forfeit the lease for non-payment of rent?

In March 2020, the government passed the Coronavirus Act 2020. This prevented landlords from forfeiting commercial leases for non-payment of rent until 30 June 2020 but has now been extended until 31 December and will be reviewed thereafter. As this suspension applies to forfeiture for non-payment, you may be able to forfeit if other grounds are available. Landlords should also consider the risk of rental voids and business rates liability in deciding whether or not to attempt to forfeit the lease.

Can I recover costs I incur for deep cleaning via the service charge and for any additional Covid-19 related services?

A landlord’s liability for providing services and the tenant’s liability to pay for services under the lease continue during COVID-19. Most service charge provisions will include the recovery of cleaning costs and an obligation to clean common parts (including deep cleaning).
Landlords will also sometimes have the ability to provide and charge for additional services where it’s reasonable to do so. If you are unable to provide certain services or your tenant is in financial difficulties, discuss the situation and negotiate temporary service charge arrangements.

Written by

Rachael Spalton

Partner and Head of Commercial Property at Longmores Solicitors

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.