A policy statement published by the government has confirmed its intention to legislate to ring-fence the billions of pounds of rent debt accrued during the COVID-19 pandemic. However, the relevant measures will only benefit tenant businesses affected by the various enforced closures who are unable to pay, with a process of binding arbitration to be available to landlords and tenants.
The statement continues to encourage landlords and tenants to try to reach agreements in the meantime, indicating that the planned system of binding arbitration should be a last resort. It suggests that agreements should either defer or waive entirely an appropriate proportion of arrears owed for the relevant period of business closure. However, it also confirms that tenants who can pay should do so.
The key takeaways from the government's statement are:
- Parties can expect to see a "strengthened" government Code of Practice published to outline the intended future principles of the legislation and encourage further negotiations before binding arbitration is introduced
- The ban on forfeiture will continue until 25 March 2022 unless legislation is passed ahead of this, to allow time for the parliamentary processes
- Government is clear that tenants should pay where they have not been affected by closures and have the means to pay - normal contractual arrangements are expected to return for such tenants from 25 March 2022, including liability for interest
- Even for tenants affected by closures, the expectation is that they should begin paying rent (and interest) as required by their lease from the point at which restrictions were lifted for their sector
- Forfeiture is expected to return as a remedy for any rent arrears owed outside of a "ring-fenced" period
- Although we await details of the proposed binding arbitration system, it is expected that it will include a power to award costs where either party fails to negotiate within the spirit of the legislative principles
The aim of the government's plan is to trigger the start of a return to ‘business as usual’, seeking to balance protecting landlords and supporting those businesses most in need. It is clear that one of its primary concerns is the threat that the build up of rent arrears poses to jobs within the sector. This is particularly evident within the government's analysis of the responses to its "call for evidence" earlier this year, which also offers some hints as to what may be on the horizon.
Responses to the "call for evidence"
Details of the (over 500) responses can be found at https://www.gov.uk/government/consultations/commercial-rents-and-covid-19-call-for-evidence/outcome/call-for-evidence-on-commercial-rents-responses-and-analysis
Unsurprisingly, these responses show the divergence of views between landlords and tenants, as well as within each group.
The majority (61%) of respondents either disagreed or strongly disagreed that the current government Code of Practice is effective. (See https://www.charlesrussellspeechlys.com/en/news-and-insights/insights/real-estate/2020/what-has-the-covid-19-code-of-practice-achieved/ for our views on this.) Almost 70% of these respondents were tenants and the key change sought was for the code to be made legally enforceable, in order to make it effective.
Whilst 89.5% of landlords were in favour of allowing the tenant protection measures to lapse on 30 June 2021, 57.3% of all respondents were against this and 66.3% of tenants liked the idea of a scheme of binding arbitration to resolve rent debt. Only 27.4% of respondents were against the proposal.
The responses to the call for evidence indicated that 84% of respondents thought that binding arbitration would either not impact employment (44%) or increase employment (40%). This compares with UK Hospitality's estimate that around 332,000 jobs could be lost in the hospitality sectors if the restrictions on landlords' remedies expired on 30 June – about a sixth of the remaining workforce of 2 million.
The predominant reason amongst respondents for supporting binding adjudication was that it forces negotiations and it was felt that the framework provided by binding adjudication will bring clarity. Additionally, this option had the least expected insolvencies.
After reviewing the responses to the "call for evidence", it is perhaps unsurprising that the government has decided to opt for the threat of a binding arbitration system to address the remaining COVID-19 rent debt. However, it seems clear that it would prefer for such powers not to be called on and is hoping that this gradual increase of pressure over the upcoming months - through an enhanced Code of Practice before the introduction of legislation - will resolve most outstanding negotiations. Only time will tell where the financial burden of pandemic rent arrears will fall but it remains clear that the government fully intends to avoid being left with the bill.
This is to be used as a last resort, after bilateral negotiations have been undertaken and only where landlords and tenants cannot otherwise come to a resolution. Ahead of the system being put in place, we will publish the principles which we will seek to put into legislation in a revised Code of Practice, to allow landlords and tenants time to negotiate on that basis.