Commercial Rent Arrears: Sharing the Financial Burden
Commercial landlords and tenants are being urged by government to work towards sharing the financial burden of rent arrears that accumulated during the covid-19 lockdowns.
In the early stages of the covid-19 pandemic, the government passed emergency legislation providing financial support to businesses directly affected by lockdown. Particularly, commercial landlords have been prohibited from using the statutory Commercial Rent Arrears Recovery (CRAR) process to recover unpaid rent until the rent accrued covered 90 days. This period has increased a number of times and is now 554 days as of 24 June.
Commercial tenants breathed a sigh of relief at the temporary restriction on the use of CRAR (which expires on 25 March 2022). There is also a ban on forfeiture for non-payment of rent, which is also due to be lifted on the same day.
Meanwhile, government consulted last spring about the way forward - how should commercial tenant protection measures be withdrawn or replaced as we recover from the pandemic? More than 500 responses from landlords, tenants and other interested parties were received, leading to government recently announcing plans for new legislation ringfencing rent debt accrued from March 2020.
Fast-forward to autumn 2021, many commercial tenants remain in arrears with pandemic-related rent to the tune of billions of pounds. The British Property Federation (BPF) estimated that by 30 June 2021, £7.5 billion of commercial rent would be in arrears. Further, according to Remit Consulting, an estimated £5.3 billion of commercial rents arising since March 2020 were unpaid as at 30 March this year (of which half were in retail).
Sadly, thousands of businesses have not survived the pandemic storm and more will undoubtedly follow.
Government statement
The government has issued a ‘policy statement’ setting out its vision to support businesses who have commercial rent debts related to the pandemic. Key points to highlight are:
Rent arrears will be ‘ring-fenced’ – The arrears will relate to business closures from March 2020 until restrictions for the relevant sector were lifted.
Arbitration - A system of binding arbitration between landlords and tenants is to be introduced. More information is needed to flesh out the details about how the proposed arbitration process is expected to work.
Sharing the financial burden - Terms must be agreed between landlords and tenants impacted by closures to defer or completely waive an appropriate proportion of rent arrears.
Emphasis will be on resolution – Bilateral negotiations must have taken place before going down the arbitration process. Arbitration is intended to be a last resort.
Revised Code of Practice – A ‘strengthened’ Code will incorporate specific principles which government intends putting into the legislation.
Payment of rent – Commercial tenants are expected to be paying rent under their lease from the point of restrictions being lifted for their sector.
There is insufficient detail on the planned legislation to comment fully, but when draft legislation is published we will revisit it.
For now, the key message is that commercial landlords and tenants will be expected to work together and share the financial burden where terms can be agreed. Now is a good time to start negotiating a workable resolution to rent arrears from the pandemic.
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