Commercial Rent (Coronavirus) Act 2022 – What does it all mean for you? (landlords)

As we briefly considered in our blog post last year, the snappily named ‘code of practice for commercial property relationships following the Covid-19 pandemic’ was published and the Commercial Rent (Coronavirus) Bill had its first hearing.

On 24 March 2022, the Bill was passed and has now become law. We look in further detail at what the Commercial Rent (Coronavirus) Act 2022 could mean for your organisation.

Who or what does the Act apply to?
The Act applies to any landlord or tenant who has a business tenancy where rent arrears accrued during coronavirus and fall within the category of ‘protected rent debt’. The rent arrears will include a service charge, VAT and interest or insurance that is paid to a landlord under the lease.

The Act allows the parties to refer the rent debt dispute to arbitration so that an independent arbitrator may determine how, when and how much of the ‘protected rent debt’ is paid.

What is ‘protected rent debt’?
Rent that is owed by a tenancy that was adversely affected by the coronavirus (i.e. required to close by the Government during any of the lockdowns); and

1. Rent that accrued from 21 March 2020 to the last day there were restrictions placed on the business (the latest being until 18 July 2021).

The rent that falls within this period will be ring-fenced.

Any overdue debt that falls outside of that period will not be caught by the Act.

It is likely that most, if not all business tenants will try to argue that they were ‘adversely affected by coronavirus’ on the basis that they were required to close completely or were restricted from trading certain items/parts of their business.

For example, a clothes shop was allowed to re-open with no restrictions on 12 April 2021 so the ring-fenced rent would only apply from 21 March 2020 to 12 April 2021. Whereas a restaurant had restrictions until 18 July 2021 so their ring-fenced debt would extend until the later date. The duration of the ring-fenced rent will therefore depend on what business the tenant runs.

There is protected rent debt – what happens now?
Either a landlord or a tenant may make a reference to arbitration. The reference will include a formal proposal about when and how the protected rent debt is to be paid. If the tenant is making the reference, it is expected that any request for relief from payment will be supported by evidence showing the tenant’s ability to pay and solvency.

In practice, we expect that the process will be used by any tenants who wish to seek relief from payment in some form.

Once a reference is made, the arbitrator will consider whether the reference was properly made, e.g. whether the debt is ‘protected rent debt’ or whether the tenant is solvent. If the arbitrator is satisfied, the parties will present their arguments and an award will be made.

What award can the arbitrator make?
The arbitrator is expected to determine the matter and make an award within 14 days. The arbitrator’s award will be binding.

If the tenant has applied for relief from payment, the arbitrator can:

1. Write off all or part of the debt;
2. Set a timetable for payment (maximum of 2 years to pay in full from the date of the arbitration); or
3. Reduce any interest payable.

These awards are designed to preserve the financial viability of the tenant whilst also preserving the landlord’s solvency. If a tenant is insolvent, the arbitrator can dismiss the matter, allowing the landlord to pursue insolvency proceedings where appropriate.

Can I claim the arbitration fees and expenses from the other party?
The party making the reference will pay the arbitrator fees in advance, however, the arbitrator can require the other party to reimburse all or part of the fees.

Each party will be responsible for its own legal costs.

If I cannot recover legal costs, can I recover the rent another way?
No – a landlord cannot commence court proceedings, wind up or forfeit the lease until 24 September 2022. Further, if a tenant makes a reference to arbitration a landlord is barred from pursuing alternative action until the arbitration is dismissed.  

This is called the moratorium period.

Remember if an award is made, the landlord is bound by that award. You cannot attempt to recover any of the debt the arbitrator has written off by an alternative method.

What happens to court claims I’ve already started?
Claims started on or after 10 November 2021 will be stayed and unpaid judgments cannot be enforced until the end of the moratorium period.

Matters, where proceedings have been issued before 10 November 2021, should not be caught by the Act. However, as a word of warning, judges may exercise their discretion to stay proceedings and recommend the parties to arbitrate or pursue alternative dispute resolution.

The future for landlords?
We would expect the majority of references to arbitrations being made by tenants as it provides them with the opportunity to request relief from paying all of the rent debt they currently owe. As such, we expect that many landlords may not want to pursue the arbitration process and instead, choose to wait until 24 September 2022 to pursue alternative means of recovering the debt.

However, there is a risk with waiting for the moratorium period to end as it is unclear whether judges will expect landlords to have attempted to arbitrate first and only consider cases in which an arbitrator has dismissed the reference. Whilst the code of practice is not yet a pre-action requirement we question whether it will become expected of parties to court proceedings, with landlords penalised in costs for not making a reference.

Further, the Act does not confirm whether the process will prejudice a landlord’s other rights, including whether the right to forfeit for rent falling due during the protected rent period will be waived or will survive if the process is engaged. The Act does not provide a clear explanation so the risks may remain until challenged and an answer is provided via case law.

If your tenant has sufficient assets, an alternative route may be to keep a low profile during the moratorium period and then take control of goods and assets to offset the rent due.

For more information

If you would like to discuss managing your rent debts or making or responding to a reference to arbitration, please contact Phil Scully, Niamh Millross or a member of the property litigation team.

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