UK Government issues policy statement on Commercial Rent Debts

As previously reported (“Commercial property evictions ban extended until 25 March 2022“), on 24 June 2021 the UK Government extended the moratorium on landlords evicting commercial tenants for non-payment of rent during the pandemic under s82 of the Coronavirus Act 2020 until 25 March 2022. Similarly, the restriction on the Commercial Rent Arrears Recovery (CRAR), which prevents landlords seizing a tenant’s goods in lieu of rent unless the tenant has more than 554 days’ of rent arrears, was extended until 25 March 2022. The restriction on the serving of winding up petitions based on a statutory demand under the Corporate Insolvency and Governance Act 2020 was also extended until the 30 September 2021.The UK Government has now issued, on 4 August 2021, a policy statement called “Supporting Business with Commercial Rent Debts” confirming that they will introduce legislation to ringfence rent arrears accrued during the pandemic due to enforced closures of commercial premises. As with previous statements, the overriding message is that tenants who have not been affected by closure and can pay their rents should do so, and that all tenants should resume making payments once restrictions in their sector are lifted.

Rent arrears accrued during the pandemic, namely from March 2020 until the relevant restrictions for a sector are lifted, will be ringfenced and the landlord and the tenant will be expected to negotiate repayment of the arrears. The UK Government is clear that it expects landlords to “share the financial burden” with tenants where there are able to do so, and to give tenants breathing space to pay. The statement goes on to confirm that landlords are expected to defer or waive “an appropriate proportion of those rent arrears“, although no guidance is given at present as to what that proportion will be. Where agreement cannot be reached, the government will introduce a binding arbitration process for the parties to follow.

Importantly the policy statement confirms a “return to normal contractual arrangements for those tenants able to pay rent debts in full and not affected by closures, and for any debts accrued outside of the ringfenced period“. That means that, once the legislation is introduced, landlords will be able to forfeit leases for non-payment of rent arising before the pandemic or arising after the ring-fenced period, which is a welcome re-arming of the landlord’s arsenal of options when faced with defaulting tenants.

The UK Government will expect landlords and tenants to negotiate in good faith to find a solution to the ringfenced rent arrears, and that the binding arbitration process will be used a last resort. The UK Government expects that negotiations will be undertaken in accordance with the legislation and the updated Code of Practice, and there will be scope if one party is not acting in good faith for the arbitrator to award costs against them.

The next step will be for the UK Government to update their Code of Practice issued in June 2020 to outline the principles which landlords, tenants and arbitrators should adhere to. The original Code of Practice was voluntary only [link to article of 22 June 2020], which meant that where a landlord or tenant refused to negotiate there was little that could be done to compel them to. Importantly the government has said that it will “seek to put into legislation” the updated Code of Practice, which is a welcome development as putting the Code on a legal footing should provide a party with more options in the event of non-compliance or a refusal to engage.

The UK Government’s statement is not unexpected as there had been widespread rumour that they would follow the model introduced in other countries. It is clearly an important step to outline for landlords and tenants what their rights and obligations will be and to bring the current restrictions on enforcement action to an end. However, it is likely that whatever the UK Government proposes there will still be uncertainty (what is the appropriate level of assistance a landlord should give to a tenant in any particular case, what sector does a tenant fall within, when was the tenant able to re-open etc.) and therefore room for dispute remains.

We will provide further updates as the UK Government publishes statements and legislative proposals.

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