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  • Overview

    Alison Sparks and Grace Mercer recently wrote a piece for New Law Journal on the importance of communication between landlords and tenants.

    On 16 June 2021, the UK Government announced that the existing restrictions on landlord’s enforcement options for commercial rent arrears would be extended until 25 March 2022. This includes forfeiture and Commercial Rent Arrears Recovery. It was also announced that there would be an extension to the end of September 2021 of the current restrictions against the use of statutory demands and winding up petitions in respect of arrears of rent, unless those arrears were not as a result of the Covid-19 pandemic.

    The government has also announced that they will introduce a new binding arbitration process for landlords and tenants who have not been able to agree concessions or payment plans. There is already in place a Code of Practice (the “Code”) for commercial property relationships during Covid-19. The voluntary scheme sets out principles of behaviour for landlords and tenants, including around the negotiation of affordable arrears settlements.  The Code has been criticised by parts of the sector on the grounds that it does not carry any weight and relies on the co-operation of both parties.   It would seem the proposed arbitration process is intended to address these criticisms.  As to whether the proposed arbitration process applies to disputes relating to forfeiture only or also those relating to unpaid rent more generally, only time will tell.  

    The intention is that rent arrears which have arisen during periods of closure due to the pandemic will be ‘ring-fenced’ and landlords will be expected to share the financial burden. The government has released very little detail on the exact nature of these new measures and how they will operate in practice. However the general message is that the new legislation is being put in place so as to assist landlords and tenants in reaching an agreement on how to handle the money owed, which could be done by waiving some or all amounts due, agreeing a longer term repayment plan or even reducing/extending the term of a lease. What has been confirmed is that the arbitration process will be delivered “by private arbitrators but in accordance with guidelines which will be set out in the proposed legislation, and they will be required go through an approval process to prove their impartiality”. It remains to be seen if all commercial leases will be subject to this process, what information will need to be disclosed by both the landlord and tenant and who will be responsible for paying for the arbitration process.

    Undoubtedly many landlords have struggled over the pandemic. A large number of commercial tenants have failed to engage with landlords to try to agree sensible interim measures in relation to their lease obligations. This is despite many tenants having now re-opened stores and resumed trading (albeit for some, trading has been limited due to government restrictions). Recent data collected by the British Property Federation indicates that a significant proportion of tenants who are well capitalised and who have traded are unwilling to co-operate with their landlord to reach agreement regarding payment.

    By the time the moratorium on evictions ends in March 2022, landlords will have encountered two years of restrictions. Further delays are likely to increase pressure from lenders and other investors who have their own interests to protect. On the other hand, some tenants have been unable to trade for months. Even if trade is possible once lockdown restrictions are eased again later this month, it could still take many more months before some businesses are back on track and trading at pre Covid-19 levels.

    There is currently nothing to stop a commercial landlord from bringing debt proceedings for arrears, even where these relate to the pandemic. Whether the government’s plans to introduce mandatory arbitration rules under the new legislation will impact a landlord’s ability to seek judgment against tenants for unpaid rents is still unclear. As such, both tenants and guarantors should be ‘live’ to the possibility that landlords may start bringing debt proceedings now so as to avoid the uncertainty and possible delays that the new legislation and the arbitration process may bring.

    Two High Court judgments ((BNY Mellon (International) Limited v Cine-UK Limited [2021] EWHC 1013 (QB) [216-314]; and Commerz Real Investmentgesellschaft GmbH v TFS Stores Limited [2021] EWHC)) have made it clear that tenants who were able to pay could not avoid landlord debt claims by relying on the Code. The Code expressly states that it was not intended to alter the contractual relationship between the parties; it was merely guidance as to best practice.

    If the lease includes a break option, the landlord may decide to operate that option to bring the tenancy to an end.   Accordingly a tenant who wishes to remain in occupation, but who is in arrears with their rent may find that their landlord chooses to serve a break notice to obtain possession whereas in “normal” times the landlord may have been happy for the tenancy to continue. If the lease is contracted out of the Landlord and Tenant Act 1954 (the “Act”), the landlord will be entitled to vacant possession after the break date. A tenant will have no right to remain in occupation after the contractual term has expired.   If the tenant is in arrears the landlord may be reluctant to enter into a new lease with them and may instead insist that the tenant vacates at risk of non-payment being a reoccurring issue.

    Where the lease is within the Act the procedure for recovering possession is not so straightforward.   As a general rule, where the Act applies a landlord who wishes to bring a tenancy to an end and secure vacant possession must serve on the tenant a notice under Section 25 of the Act opposing the grant of a new tenancy on one on the statutory grounds under the Act. The landlord will need to demonstrate that it is entitled to rely on the statutory grounds for possession specified in the notice, for example re-development or own occupation.  A tenant may on receipt of a Section 25 notice apply to the court for the grant of a new tenancy and ask the court to determine whether the landlord is entitled to possession or whether a new tenancy should be granted. Due to delays in the court system, it could be several months before a decision is made. Further, it remains to be seen whether a landlord’s right to oppose the grant of a new tenancy on the grounds persistent delay in paying rent will continue to exclude rent arrears accrued during the pandemic. 

    Under the Corporate Insolvency and Governance Act 2020 a moratorium exists on presenting winding up petitions where the pandemic has had a financial effect on a tenant until 30 September 2021. It remains to be seen whether this will be extended again to March 2022 to align with the forfeiture rules. In principle, it is still possible to present a winding up petition where a landlord can demonstrate reasonable grounds for believing that the pandemic has not has a financial effect on the tenant company, however, there remains an evidential burden upon the landlord.

    The conclusion is that communication remains key – tenants will be aware that when restrictions are lifted, they could face severe financial repercussions. Where tenants are unable to meet their obligations, it will often be in the interests of both parties to come to a sensible compromise.  A tenant who has communicated with their landlord throughout the pandemic may find that the landlord is less likely to seek possession by for example exercising a break option in the lease or serving a Section 25 notice under the Act opposing the grant of a new tenancy.  Further, a landlord who has listened to their tenant will hopefully be rewarded by the tenant making greater effort to reach a sensible agreement for payment of the arrears.

    The new legislation appears to be more limited in scope than the current moratorium on forfeiture, which applies in respect of any rent arrears, whether or not these are pandemic related. The announcement made specific reference to sectors such as nightclubs (which have yet to re-open) and hospitality and focuses on when a business has had to remain closed during the pandemic. It is entirely possible that the new legislation may extend to other sectors where the restrictions have been for more limited periods but it is not yet clear whether businesses will be treated differently under the scheme depending on how the government imposed restrictions have affected their particular sector. The government has stated that it expects landlords to make allowances for the rent arrears relating to these periods of closure and to share the financial impact with their tenants.

    While the new binding arbitration process may benefit tenants where their arrears relate to periods when their premises had to remain closed, this will depend on how the legislation is drawn up. One solution that fits all is unlikely to work in practice for reasons set out above, particularly with winding up petitions due to return six months before the moratorium expires.  It also remains to be seen how the process will be applied to arrears which have already been determined by the courts and judgment given in favour of the landlord.   Overall the uncertainty means that landlords and tenants should continue to engage with each other and seek to agree a way forward if possible, particularly as the government’s current guidance is that they should be working together to resolve matters as far as possible.  The indication is that this guidance is likely to continue albeit in a more prescriptive way.

    This article first appeared in New Law Journal https://www.newlawjournal.co.uk/content/landlord-tenant-relationships-open-for-business-

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