So what now for landlords and tenants following the lifting of restrictions
In March 2020 the UK Government began restricting actions that could be taken to recover unpaid rent. A ban on forfeiture for non-payment of rent was introduced in the Coronavirus Act 2020 and restrictions on the use of winding-up petitions and statutory demands (generally) were subsequently introduced in the Corporate Insolvency and Governance Act 2020 (CIGA).
The protections afforded to businesses against aggressive debt recovery action measures remained in place for approximately eighteen months and started to be phased out with effect from 1 October 2021. The last of these restrictions will be lifted at the end of March 2022.
In this article, DLA Piper’s experienced Real Estate and Restructuring lawyers assess what options landlords have now.
Landlords were among the first to feel the effects of the COVID-19 pandemic with tenants forced to shut business premises as part of a national lockdown. Many of the usual options available to landlords were restricted to prevent aggressive debt recovery action and these were kept largely in place to give tenants breathing space to trade post lockdown and allow cash levels to recover.
With the lifting of the last restrictions at the end of March 2022, the options available to a landlord who is seeking to recover rent arrears after this time are set out below.
Options for landlords
Summary: Non-payment of rent exposes a tenant to the risk that a landlord can peaceably re-enter the premises without notice and take possession of the premises without court action by changing the locks, effectively ending the lease – although relief from the courts can be sought and is available to tenants if they pay arrears plus the landlord’s costs.
Current position: Forfeiture was suspended from 26 March 2020. This suspension ends on 25 March 2022.
Summary: Commercial Rent Arrears Recovery (or CRAR) allows a landlord to instruct an enforcement agent to take control of a tenant's goods and sell them in order to recover an equivalent value to any rent arrears.
Current position: Use of CRAR was restricted by increasing the minimum amount of net unpaid rent that must be outstanding before CRAR may take place. This restriction ends on 25 March 2022 and the minimum amount of net unpaid rent returns to seven days.
Summary: A statutory demand is a written demand for payment of a debt. It is often used as a quick and relatively inexpensive method for landlords seeking to take action for non-payment of rent. Statutory demands are often issued to seek to pressure debtors into paying the sums due prior to more formal legal action in the form of a winding-up petition, although a landlord is not required to issue a statutory demand before issuing a winding-up petition.
Current position: Prior to 1 October 2021, there was a blanket ban on statutory demands being used for presenting winding up petitions (whether the debt related to unpaid rent or otherwise). The blanket ban was lifted with effect from 1 October 2021, however, due to the restrictions on winding up petitions (see below), they have been of little effect. As from 31 March 2022, statutory demands will become effective again.
Summary: A winding-up petition is essentially a court application for a debtor to be put into compulsory liquidation on the grounds that it is unable to pay its debts. A landlord that has not been paid can simply present a winding-up petition at court. Commonly, however, a statutory demand that has not been paid within 21 days is used to establish the debtor’s insolvency.
Current position: Since 1 October 2021 it has been possible to petition for a debtor to be wound up if certain conditions were met. The key condition for commercial landlords was that the debt owed must not unpaid by the tenant due to a financial effect of COVID-19. These restrictions will be lifted from 31 March 2022.
Summary: A landlord can issue debt proceedings in court to recover unpaid rent. Prior to the restrictions on winding-up petitions and statutory demands, this was an option seldom used by landlords, unless there was some dispute in relation to whether the debt was due and owing (which would make the winding-up petition route unavailable), as it is a more lengthy and costly procedure. Commencing debt proceedings for rent may be more attractive where the tenant has assets over which a charging order can be obtained or it has goods that can be controlled using writs and warrants of control.
Current position This was not restricted.
Summary: Many landlords hold a rent deposit on which they can draw when rent is not paid.
Current position: This was not restricted.
Summary: Landlords can also seek to recover rent from any third parties who have guaranteed the tenant’s liabilities under the lease.
Current position: This was not restricted.
Commercial Rent (Coronavirus) Act 2022
In order to prevent a wave of landlord action following the lifting of the restrictions at the end of March 2022, a limited number of tenants will have access to an arbitration scheme established by the Commercial Rent (Coronavirus) Act 2022 (CRCA 2022). The arbitration scheme is open to tenants with rent arrears relating to the period from 21 March 2020 until the date the specific COVID-19 restrictions affecting the relevant tenant business finally ended (the protected rent debt). Protected rent debt must be dealt with under the arbitration scheme and other enforcement options are restricted while the window for referrals under CRCA 2022 is open.
The Government's impact assessment for the Bill in 2021, using HM Treasury modelling, suggested that there were 210,00 tenant businesses with a total of GBP1.5bn of deferred aggregate rent. However, it is estimated only 50,000 tenant businesses fall within the scope of the new legislation and of those it is estimated that only 5,000 – 13,000 rent disputes will be referred to arbitration. It remains to be seen how popular the arbitration scheme will be but we think that the complexity of the scheme and the uncertain outcome from arbitration may deter parties from using it.
For further details of who is eligible to use the arbitration scheme and what rent is within the scope of CRCA 2022, please see our previous briefing: Commercial Rent (Coronavirus) Bill.
The window for either the landlord or the tenant to make a reference to arbitration is six months from the date CRCA 2022 came into force i.e. it will close on 24 September 2022 (unless extended). During this window, a landlord is restricted from using its usual enforcement methods set out in the table above.
Changes to the Bill as originally laid before parliament
The Commercial Rent (Coronavirus) Bill 2022 passed through both Houses of Parliament without a significant volume of amendments. Of note was:
- the House of Lords sought to clarify the position of guarantors. The amended wording in CRCA 2022 confirms that an award is to be taken as altering the terms of the tenancy in relation to unpaid rent arrears from the lockdown period. This extends to any guarantor, any former tenants who are liable for the failure of the tenant to pay rent and any person who is liable for the payment of rent on an indemnity basis.
- the House of Commons made changes to the fees and expenses provisions. These amendments do not change the original position that where an award is made, the arbitration fee should be split between the parties (unless the arbitrator provides otherwise) and each party should pay their own legal fees. However the House of Commons amendment provides that legal or other costs incurred in connection with the arbitration shall not be recoverable under the terms of the business tenancy so the landlord will have to bear these costs.
Areas of interest
The provisions of CRCA 2022 will have a number of consequences for landlords and the actions they may decide to take to recover protected rent debt. Landlords will want to consider some of the factors below.
Arbitration as a "landlord" defence?
Where an arbitrator has made an award following a referral to arbitration, the tenant may not include the award in any company voluntary arrangement, scheme of arrangement or restructuring plan for a period of 12 months following the date of the award. As a result, we may start to see landlords making referrals to arbitration where there are concerns that the tenants may seek to use one of these processes to write off the debt. Any such referral would be required to take place before the tenant company enters the process as a referral cannot be made thereafter. As the arbitration only deals with ring fenced rent arrears, this would not prevent a tenant from using a process to reduce future rent so using arbitration as a defence may have limited success.
What is the impact on a landlord’s voting entitlement in a subsequent restructuring?
Is there an opportunity to use the arbitration scheme to reduce the voting entitlements of certain landlords? If the outcome of the arbitration is a smaller debt due to the landlord or it is payable in instalments over 24 months, CRCA 2022 is silent on the impact on a landlord’s voting entitlement should the tenant enter an insolvency process prior to the debt being paid. Given the final and binding nature of the arbitration, it is likely that the voting entitlement would be the reduced amount. As a result we may start to see tenants seeking to use the arbitration scheme to reduce the voting entitlements of certain landlords as a preliminary step to a subsequent restructuring.
What is the situation with rent deposits?
Any amount that has been drawn down from a rent deposit prior to CRCA 2022 coming into force to meet unpaid rent from the ringfenced period is considered unpaid for the purposes of CRCA 2022. It is therefore possible for the tenant to refer this amount to arbitration and under the terms of the award by the arbitrator for such amount due to the landlords to be reduced. This is cashflow risk for the landlord who may have already paid such sums to a lender prior to the time the arbitration takes place.
How will multiple arbitrations be dealt with?
It remains to be seen how arbitrators will deal with this where they are faced with an arbitration that involves a tenant or landlord who is the subject of multiple, separate referrals to arbitration. While it is open to the parties to choose their arbitrator, there is no requirement to combine arbitrations or take into account the impact of other arbitrations involving the parties.