Covid-related Rent Arrears Claims to be stalled in favour of Arbitration
Commercial rent arrears which are attributable to government-mandated lockdowns during the covid-19 pandemic are to be ‘ring-fenced’, under proposed legislation.
Rent arrears that have built up during covid lockdowns and which remain unpaid are increasingly a sore point for the parties. Landlords want to see the rental income arrive in their bank accounts, while tenants may still be struggling to recover from the impact of the pandemic (let alone pay off their debts), notwithstanding the government measures introduced to protect them from eviction.
A lot of money is at stake: the British Property Federation estimated that by 30 June 2021, £7.5 billion of commercial rent would be in arrears; while Remit Consulting estimated that £5.3 billion in unpaid commercial rent arrears arising since March 2020 were unpaid as at 30 March 2021 - half of it in the retail sector alone.
Since the successful claim for rent arrears early this year by the owner of London’s Westfield Shopping against The Perfume Shop, there have been noteworthy developments on covid-related rent arrears. You can read our article on that ruling here:-https://www.ngmtaxlaw.co.uk/blog/1621874136762/covid-19-rent-arrears-a-lesson-in-engagement
Hot on the heels of that case, a ruling was handed down by the High Court which heard three cases together in NY Mellon v Cine-UK [2021] EWHC 10131. In each case, summary judgment had been sought against the defendants – Cine-UK, Mecca Bingo and Sports Direct - for rent arrears.
The defendants defended the claims on various grounds, to no avail. The court held:
· The voluntary (and since updated) Code of Practice on commercial leases and rent arrears is outside the litigation process. It did not apply to tenants who were not said to be unable to pay
· Given the ordinary meaning of the words ‘damage or destruction’, the rent cesser provisions were ineffective during government-mandated lockdowns
· The tenants could have insured themselves against the risk; it wasn’t necessary to imply that the rent cesser provisions applied during lockdowns – the leases worked perfectly well without it
· There is no such thing as ‘temporary frustration’ in law that suspends a contract for a period of time. In law, frustration actually terminates the contract
· Covid-19 and the covid regulations are not supervening events which temporarily suspend the tenant’s obligations to pay the rent
What’s the future?
Government has now set out plans to expressly ring-fence covid-related commercial rent arrears from enforcement action. This month, the Commercial Rent (Coronavirus) Bill was published and it is clear that while tenants will be encouraged to pay rent arrears if they can, landlords will be expected to share the financial burden.
Landlords and businesses should particularly note two key provisions in the bill which, once passed, will stall court claims for rent arrears:
· Binding arbitration - A system of binding arbitration is proposed. The emphasis will be on resolution between the parties, and arbitration intended as a last resort. There will be a stay of any debt claim that includes ringfenced debt, issued between 10 November 2021 and when the Bill comes into force.
The ringfenced debt under these claims, and any county court or high court judgments made in respect of such claims, will be subject to arbitration. Furthermore, registration of a judgment for ringfenced debt may be cancelled in the wake of an arbitration award.
· Landlords will not be able to petition for bankruptcy of a business tenant on the basis of non-payment of a statutory demand relating to ringfenced debt served between 10 November 2021 and the Bill coming into force. Also, no petition can be made if based on a judgment debt where the claim was issued in this period.
The key message is that commercial landlords and tenancies should negotiate and attempt how to share the financial cost of covid-related rental debt.
However, resolution is not always possible and we recommend you consider taking specialist advice from dispute resolution experts on what steps you should consider taking.
1NY Mellon v Cine-UK [2021] EWHC 1013
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