The government's 4 August 2021 policy statement "Supporting commercial businesses with rent debts" implicitly acknowledges (without doing anything so crass as admitting it...) that the voluntary code for negotiating rent concessions between landlords and tenants was, just maybe, not the runaway success it was expected to be.  A huge number of landlords and tenants have pragmatically negotiated with each other and in our experience the vast majority on both sides have been extremely cooperative and sympathetic to the commercial pressures of their opposite numbers.  However, sightings of the voluntary code over the last few months have been rare so it is perhaps unsurprising that with the new March 2022 deadline creeping up on us the government have decided to threaten further intervention.

A new, improved voluntary code mark 2.0 is promised shortly but it will be worth paying attention to because, as the policy statement makes clear, it will be closely followed with legislation requiring landlords and tenants to submit to binding arbitration if they cannot reach a resolution on arrears themselves and it is to be expected that a failure to follow the code will be dimly viewed and at the least will result in costs penalties.

The government also indicates that arrears will be ringfenced so that only those accrued between March 2020 and the date that the relevant tenant's sector "re-opened" will be up for discussion.  Arrears that pre-date or post-date that period are to be paid in full by the tenant.

That leads to a couple of immediately difficult questions and it will be interesting to see how they're handled:

  • what is a "re-opening"?  For many sectors there is a clear material difference between being allowed to accept some customers and being allowed to permit full access;
  • seeing as many businesses presumably haven't been building up significant cash reserves, what are they going to pay the rent with?

As noted in an FT article of a couple of weeks ago, landlords have also taken a battering since March 2020 and in many cases have been in fraught discussions with lenders over breach of rental income covenants.  They understandably will want clarity as soon as possible, but if the government proposals do not give tenants the practical ability to pay their rent then those discussions with lenders won't get any easier - indeed they might get harder because the landlord will now have the full arsenal of recovery options open to them, even though they know they're not likely to receive full credit on non-ringfenced arrears.

It remains the case that generally speaking both sides aren't just presenting themselves as victims of this crisis, they actually are victims.  Things are only likely to get trickier over the next few months and the reality for landlords is that any new intervention from government is unlikely to improve their position as against their tenants.  Equally for tenants the rhetoric from government around paying what is due sends a pretty clear message that absent any commercially agreed deal, they're soon likely to be compelled to start full payment.  It will therefore be important for both sides to get clarity early as to what ringfencing and arbitration will look like so they can start to more effectively plan their mitigation strategy and come to a pragmatic view on their negotiating positions.

It's therefore a little concerning that the government has already missed its first self-imposed deadline to introduce arbitration legislation before the summer recess - threatening intervention that only then comes very late in the day doesn't help anyone.  

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