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Recovery of Commercial Rent Arrears and Service Charges – An Update

The Covid-19 pandemic has had a significant impact on the recovery of rent and service charges for commercial premises. The most obvious is that office staff have worked from home and many non-essential businesses such as shops, gyms, pubs and restaurants have spent long periods of time closed and/or subject to statutory restrictions. Unsurprisingly, franchisees who have a lease of commercial premises in order to operate their business are under enormous pressure as a result of the effects of the pandemic, due to loss of trading income. There is estimated to be around £7 billion of resulting commercial rent debt in the UK.

Since March 2020, there has been restrictions on landlords’ powers to: forfeit a commercial lease for non-payment of rent and service charges, the use of Commercial Rent Arrears Recovery (CRAR) and presenting a winding up petition based on a statutory demand served between 1 March 2020 and 30 September 2021.

Government Code of Practice

On 9 November 2021, the Government announced a new Code of Practice for landlords and tenants, to apply with immediate effect. The Code can be found here and is designed to provide guidance (not binding law) to both landlords and tenants in settling disputes relating to outstanding commercial rent arrears that have accrued since the start of the pandemic. This Code replaces the previous version first published in June 2020 (and updated in April 2021).

Where possible, franchisors should join or lead these negotiations and discussions to support their franchisees and the future financial health of their system in the current crisis.

Commercial Rent (Coronavirus) Bill

At the same time, the Government also published its draft ‘Commercial Rent (Coronavirus) Bill’ which is currently making its way through Parliament (https://bills.parliament.uk/bills/3064). The new legislation is expected to be in force from 25 March 2022 and is subject to change following Parliamentary scrutiny.

In broad terms, the draft Bill proposes to ‘ring-fence’ all commercial rent, service charge and insurance arrears, interest, VAT and rent deposit top-ups for any business tenant who has been subject to a ‘mandated closure’ of their premises because of the pandemic (“protected rent debts”), from 21 March 2020 to the date the last restrictions were removed from the tenant’s specific sector (the latest date being 18 July 2021) (the “Protected Period”). The Code of Practice sets out at ‘Annex A’ the relevant periods which are protected for different business sectors. Any arrears which are not protected rent debts and fall outside of the Protected Period are not within the scope of the proposed Bill.

Ultimately, for such ‘ring-fenced’ arrears, the moratorium is extended. Commercial landlords will not be able to forfeit a lease, issue a claim for a protected rent debt, use CRAR, issue a winding up/bankruptcy petition or draw-down on a rent deposit until:

  1. 6 months have passed since the commencement of the Act if neither the landlord or tenant has applied for an arbitration; or
  2. The date when a statutory arbitration has been concluded.

Further details of the procedure governing these statutory arbitrations can be found in the draft Bill and the Government Code of Practice. This arbitration process will not affect commercial landlords and tenants who have previously reached a voluntary agreement for re-payment of outstanding arrears. The Government estimates that around 80% of landlords and tenants have already made such voluntary arrangements.

In addition to the legally binding arbitration process, the Bill also proposes to have retrospective effect:

  1. To allow commercial tenants to apply to stay (i.e. pause) a debt claim issued at Court on or after 10 November 2021 for rent accrued during the Protected Period to enable the matter to be dealt with by the statutory arbitration process; and
  2. To prohibit landlords from applying to enforce money judgments obtained on or after 10 November 2021 for arrears accrued during the Protected Period.

What happens if commercial premises have not closed because of the pandemic?

In cases where commercial tenants have not been adversely affected by forced closure to their premises because of the pandemic, landlords will be permitted to exercise their usual remedies of enforcement when the moratorium is lifted. The ban on forfeiture and the use of the CRAR is due to end on 25 March 2022 and landlords will also be able to issue winding up petitions in relation to unpaid rent after 31 March 2022.

Despite this, before landlords and tenants decide to take legal action they are likely to be expected to demonstrate that they have considered and applied the Government Code of Practice.

If you require more information or advice on a specific case, please contact Jessica Waters or Nicola King.

Correct at the time of drafting

17 November 2021

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