Government policy paper on resolving commercial rent arrears

On 4 August 2021, the government published a policy paper in relation to how it proposes to support businesses with commercial rent debts. Whilst we still await much of the necessary detail on these proposals, the paper does confirm that:

• a revised code of conduct will be published shortly;

• there will be legislation in due course for binding arbitration to be used as a last resort for ringfenced debt accrued from March 2020 for commercial tenants who have been affected by Covid closures until restrictions for their sector are removed; and

• the government "expect[s] terms to be agreed between landlords and tenants impacted by closures to defer or waive entirely an appropriate proportion of those rent arrears" but goes on to say that "tenants who can pay, should pay".

The arbitration scheme

There are examples of the type of proposed arbitration scheme in other jurisdictions, including in Australia where a mandatory code of conduct was introduced in April 2020. This scheme provided for disputes to be referred either to mediation or if that provided unsuccessful, adjudication or arbitration. At this stage, we await the detail of how the arbitration scheme will work in the UK and what elements of other jurisdictional schemes will be taken on board or adopted. The paper does suggest that input and proposals on the scheme from stakeholders such as the British Retail Consortium, UK Hospitality and the British Property Federation will also be taken on board.

The paper fails to address the question of what an "appropriate proportion" for landlords to agree to defer or waive is and this currently remains a hotbed of contention for many outstanding disputes between landlords and tenants. The paper goes on to confirm that clear rules will be put in the scheme to ensure impartiality and that the expectations that tenants and landlords will both contribute to the cost of the arbitration if both are found to have negotiated in good faith but where a party has not negotiated in the "spirit of the legislative principles" arbitrators may be empowered to grant the costs of the arbitration as part of their decision. However, how this will be implemented in practice where parties are poles apart and have no guidance on an "appropriate proportion" remains to be seen. Indeed in contrast, a successful landlord in litigation would be likely to be entitled to a significant proportion of their costs. It remains unclear how the scheme will interact with any such proceedings already issued in the courts, which many landlords have elected to proceed with in many instances (this being their only available remedy). There are currently also no proposals in respect of how landlord entities should deal with any rent arrears up the chain where, for example, lenders enforce in full.

In terms of arrears outside of the ringfenced period, the paper confirms that landlords will be able to exercise their rights to evict any tenant for non-payment of rent and that they will also be able to charge interest from the end of the ring-fenced period onwards where leases permit. Of course, under recent rent arrears decisions before the courts (which have been determined by summary judgment hearings) all arrears, interest at the contractual rate and costs have been awarded and it will therefore be interesting to see how this will be addressed in the arbitration scheme.

At this stage questions and logistical hurdles rather than answers remain as the industry tries to grapple with how to recover and move forward from the pandemic, with many landlord and tenant relationships changed for a considerable period in light of the current strains.

Winding-up petitions and statutory demands

We previously reported on the mismatch of dates that apply to existing landlord remedies, with the restrictions on commercial forfeiture for rent arrears and CRAR running to 25 March 2022 and the restrictions on winding-up petitions and statutory demands expiring on the earlier date of 30 September 2021.

In this latest announcement, the government has indicated that it will be extending the restrictions on winding-up petitions and statutory demands beyond 30 September 2021 insofar as they apply to a landlord's ability to use insolvency measures to recover rent arrears. This will, no doubt, be a further disappointment to landlords, but it is not entirely unexpected given the approach the government has taken since March 2020 to landlord remedies. Nevertheless, the fact that winding-up petitions and statutory demands can resume for non-ring fenced arrears will be of some relief outside the landlord community, for example suppliers of goods. While the on-going government support measures and the furlough scheme have been crucial for some businesses badly impacted by Covid, the side effect is that many businesses that would ordinarily have failed during the period since March 2020, have instead been kept alive on the equivalent of government financial life support. With the country now looking to emerge from lockdown, it is arguably time for the insolvency regime to be allowed to do its job again, to enable the liquidation of such so-called "zombie companies" and the return of (any) value in such businesses back to the recovering economy.