Landlords and tenants of commercial property have spent many months wondering what the rent recovery landscape would like after the planned unlocking in June 2021. Responses to the government's call for evidence were submitted back in April/May. Yesterday, the wait was finally over.
The government's announcement has confirmed that there will be continuing breathing space for businesses which had to remain closed during the pandemic and are unable to pay their rent. The headline news is the ban on forfeiture until after 25 March 2022, but the restrictions on landlords' wider remedies also remain for the time-being (at least in relation to arrears accrued during the pandemic), i.e. winding up petitions, statutory demands and CRAR. The indication from the government is that arrears will be "ringfenced" where they have arisen during periods when the pandemic has forced tenant businesses to close.
A new "arbitration" process
The clear expectation from government is for landlords to "share the financial impact" of the pandemic with their tenants. To do this, it intends to introduce legislation to help parties to come to an agreement regarding arrears through a "binding arbitration process". How such a process will work - when there is a negotiated contract in place between the parties which has already made provision for the allocation of risk - remains to be seen.
Yesterday's announcement suggests that the so-called "arbitration" of arrears claims will really work as a third party re-negotiation of the original lease. Although we await the detail, such interference with contractual arrangements agreed between commercial parties would be a fundamental change and could undermine the principles set out in the recent High Court judgments on coronavirus arrears, such as Commerz Realinvestmentgesellschaft mbh v TFS Stores Limited (Lockdown arrears: the High Court gives its view | Charles Russell Speechlys) and Bank of New York Mellon (International) Limited v Cine-UK Limited (Risk allocation in commercial leases: the High Court considers rent suspension, insurance and frustration arguments | Charles Russell Speechlys).
Master Dagnall confirmed in Bank of New York Mellon that:
"In times of uncertainty the law must provide a solid practical and predictable foundation for the resolution of disputes and the confidence necessary for an eventual recovery... Contractual rights are to be evaluated by applying settled principles to the contract in question. Legal certainty remains paramount and gives the surest basis for the resolution."
The Master noted that anything else was a matter for Parliament and it seems that we can expect its intervention shortly. However, many tenants affected by the lockdowns will regard this as too little too late given that most parties to commercial leases have already been negotiating alternative arrangements for rent liabilities since Lockdown 1 over a year ago. Indeed, there is a real risk that those tenants who have complied with government guidance by negotiating appropriate agreements with their landlords will suffer more financial disadvantage than those who have failed to engage in discussions.
"Actionable" rent debt
In seemingly more positive news for landlords, the announcement states that tenants should start paying their rent as soon as restrictions change and they are permitted to open. There is a clear indication that rent debt falling due after the relevant sector restrictions on trading are lifted will be "actionable" by landlords as soon as the tenant protection measures are lifted. However, we shall have to wait to see how that plays out in practice in the detail of the continuing restrictions on landlords' remedies.
However these proposals for dealing with coronavirus arrears and ongoing rent liabilities play out, it seems there is more change to come in the commercial property sector. The government has confirmed that it remains keen to undertake a review of commercial landlord and tenant legislation later this year - including consideration of issues under the Landlord and Tenant Act 1954 and different models of rent payment.
Landlords may well feel nervous about the outcome of this review - especially given the drastic changes being proposed to the residential tenancy sector. Many will be forgiven for feeling that they have enough to contend with at present, especially given the uncertainty for many parts of the commercial property market arising from COVID-19. However, the bigger question for landlords for now will probably be why they are still being expected to shoulder the burden of the pandemic experienced by this sector.
The extension applies to all businesses, but the new measures that will be introduced by primary legislation will only cover those impacted by closures. This mean that rent debt accumulated before March 2020 and after the date when relevant sector restrictions on trading are lifted, will be actionable by landlords as soon as the tenant protection measures are lifted.