In our last property blog, we discussed the current protections for commercial tenants affected by COVID-19, and the Government’s intended arbitration scheme to deal with ‘ringfenced’ debt (unpaid rent, service charges and insurance arrears that has built up by tenants who were required by COVID-19 laws to close their premises).
By way of update, last week the Government:
- issued a new Code of practice for commercial property relationships following the COVID-19 pandemic, which applies to all unpaid rent accrued since March 2020 (whether ringfenced or not); and
- introduced new legislation to Parliament, the Commercial Rent (Coronavirus) Bill, to establish a binding arbitration process dealing with certain rent debts incurred during the pandemic (‘ringfenced’ debts).
We’ve set out some of the key points from the Government’s announcement below. You can also find the Government’s press release here and the full Code of practice for commercial property relationships here.
Code of practice for commercial property relationships following the COVID-19 pandemic
What is it?
This Code of practice, issued on 9 November 2021, is aimed at helping landlords and tenants negotiate a resolution to unpaid rent (including service charges and insurance) which has accrued since March 2020 due to the COVID-19 pandemic. It replaces the Government’s previous code of practice for commercial property relationships, issued in June 2020 and updated in April 2021.
The Code also provides guidance on how the measures in the new Commercial Rent (Coronavirus) Bill will work.
Who does it apply to?
This Code applies to all commercial leases held by businesses in England and Wales, under which tenants have been unable to pay rent due to the COVID-19 pandemic (whether this rent is ‘ringfenced’ or not).
Is the Code legally binding?
No, not currently, but the Code provides guidance on best practice for negotiating settlements. The Government strongly encourages tenants and landlords to use the principles set out in the Code when negotiating, and it is intended that arbitrators will take the principles of the Code into account when making their binding decisions about ringfenced debt.
Ultimately the relationship between you and your landlord will be governed by law. If you need legal advice on your negotiations with your landlord, you can access a specialist lawyer in a few simple steps using our Ask a Lawyer service.
What are the key principles of the Code?
The Code sets out the following key principles for landlords and tenants negotiating unpaid rent:
1. Tenants and landlords should work together for the best outcome
Tenants who are able to pay their rent in full should do so. Where tenants are unable to pay in full due to the impact of COVID-19, they should negotiate and work with their landlord to reach a satisfactory solution. Landlords should share the burden where they are able to and in accordance with the principles set out in the Code.
2. Existing agreements should be honoured
Any agreements already made between tenants and landlords to deal with rent should be honoured, and the new Code and arbitration process do not change this principle.
3. Landlords and tenants should follow the principles of the Code when negotiating
These are:
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- Transparency and collaboration, and acting in good faith;
- Taking a unified approach when dealing with stakeholders;
- Acting reasonably and responsibly; and
- Acting to resolve a swift resolution to avoid costly and burdensome processes.
The Code aims to preserve the viability of businesses so both parties should be transparent about their financial circumstances and provide relevant evidence to assist their negotiations.
4. Substantial borrowing or restructuring is not considered fair
If the negotiations result in either party requiring substantial borrowing or restructuring, this will not be considered fair. A tenant’s business must also be viable to qualify for rent concessions. This means that if they have not been able to pay any rent since restrictions were lifted, this may be evidence that their business is not viable.
5. Rent payments should be treated in accordance with the Code
Tenants should be clear about the periods that any rent payments they make relate to. Otherwise, if a tenant makes a payment after the end of the ringfenced period and doesn’t specify which period it relates to, that payment can’t be used by the landlord towards ringfenced rent.
6. Legal advice may be required
Parties may wish to seek legal advice when agreeing payment arrangements, to ensure they are complying with their legal obligations.
Commercial Rent (Coronavirus) Bill
What is it?
This Bill deals with rent debt built up by businesses who were forced to close during the pandemic (‘ringfenced’ debt). It:
- Establishes a binding arbitration system to deal with the ringfenced debt where a landlord and tenant have not been able to agree this independently (see below for further guidance); and
- Temporarily extends protection for tenants in relation to ringfenced debt until a settlement is reached or the timeframe for applying for arbitration has passed.
Who does it help?
This Bill aims to assist commercial landlords and tenants to use a binding arbitration process to settle ringfenced debt, where other negotiations have failed. The Government encourages landlords and tenants to negotiate in accordance with the principles of the Code listed above, before resorting to arbitration.
The Code sets out the ringfenced periods for different types of businesses. As a general rule, the ringfenced period for a business tenant runs from 21 March 2020 until the last date legal restrictions were removed from their sector (ie when they were permitted to re-open).
For example:
- a clothing shop in England – the ringfenced period ran from 21 March 2020 to 12 April 2021 when nonessential retail was permitted to reopen;
- a café in England – the ringfenced period ran from 21 March 2020 to 18 July 2021 when restrictions ended on table sizes and requirements to eat while seated.
How will the binding arbitration process work?
Currently the Bill anticipates a six month window for parties to apply for arbitration, from the date the Bill is passed into law (expected to be by 25 March 2022). Each party will have an opportunity to provide submissions and respond to the other party’s proposals, and the arbitrator’s final decision will be binding. There will only be grounds for an appeal in limited circumstances.
What other temporary protections in relation to ringfenced debt does the Bill provide?
Where a tenant’s debt is ringfenced, the Bill anticipates that the following protections will apply until the parties agree a settlement (through arbitration or otherwise), or the time limit for applying for arbitration expires.
- Protection from eviction, winding up and CRAR process
From the date the Bill becomes law, in relation to ringfenced debt, landlords will continue to be prevented from forfeiting the tenancy, bringing winding up proceedings and/or using the Commercial Rent Arrears Recovery procedure (CRAR) to seize goods as settlement for unpaid ringfenced rent. Note that these protections are currently already in place for tenants that have built up rent arrears due to COVID-19 (whether ringfenced or not) but they are due to expire in March 2022. - Protection from debt and bankruptcy proceedings
From the date the Bill is passed, landlords will be prevented from issuing debt proceedings in the Court while arbitration is available or ongoing, and/or from issuing bankruptcy proceedings in relation to ringfenced debt. This also means that any Court proceedings for ringfenced debt issued between 10 November 2021 and the time the new legislation is passed will be subject to arbitration, and any bankruptcy petitions or orders made between 10 November 2021 and the time the new legislation is passed which are based on ringfenced debt will be void. - Protection of tenancy deposit
Landlords will not be able to draw down on a tenant’s deposit to pay outstanding ringfenced debt (and if this has already been done, a tenant’s requirement to top up the deposit will be suspended).
What about tenants whose rent is not ringfenced?
The current COVID-19 protections for tenants who have been unable to pay rent due to the pandemic, whether their debt is ringfenced or not, continue to apply until March 2022.
The Bill is currently being passed through Parliament, so may be subject to change. The Code may also provide particular restrictions depending on your circumstances (for example, it includes restrictions on a tenant restructuring their business). If you require legal advice on what the upcoming legislation may mean for you, you can access a specialist lawyer in a few simple steps using our Ask a Lawyer service.
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Marion joined Sparqa Legal as a Senior Legal Editor in 2018. She previously worked as a corporate/commercial lawyer for five years at one of New Zealand’s leading law firms, Kensington Swan (now Dentons Kensington Swan), and as an in-house legal consultant for a UK tech company. Marion regularly writes for Sparqa’s blog, contributing across its commercial, IP and health and safety law content.