14 December, 2021
Britain's pubs, shops, cafes, restaurants, small businesses are the beating heart of our economy, and it remains as a priority to protect and support businesses during these unprecedented times. In most cases, businesses have not been able to open and function as usual due to COVID-19 and therefore, have been unable to pay their rent. This Bill aims to bring the cases where landlords and tenants have been unable to resolve disputes over rent arrears to a swift resolution.
The Commercial Rent (Coronavirus) Bill proposes new legislation and a new Code of Practice with the purpose of resolving remaining commercial rent arrears accrued during the COVID-19 pandemic. The Government have published a new Code with the desire to settle any remaining disputes between landlords and tenants which will work in unity with the Bill. It is issued in response to the impact of COVID-19 on landlords and tenants in the commercial property sector and replaces the 'Code of Practice' for commercial property relationships issued on 19 June 2020 and updated on 6 April 2021.
Who does it apply to?
This new Code applies to all commercial leases held by businesses which have built up rent arrears, due to an inability to pay, as a result of the impact of COVID-19. This is applicable for the hospitality, retail, leisure, manufacturing, industrial and logistics, ports, food and drink and rural sectors. Further, businesses within the agricultural sector may also consider the principles included, if they consider the legal framework relevant to agricultural tenancies.
The New Code
The purpose of the new Code is to prevent viable businesses from ceasing to operate due to rent debt accrued as a result of COVID-19. Therefore, the Code is intended to assist landlords and tenants in resolving disputes relating to rent owed as a result of premises having been closed or suffering from restricted business as a result of COVID-19. The Code is relevant for all commercial rent debts accrued since March 2020 within England, Wales, Northern Ireland and Scotland.
The Code sets the scope and content of the Bill, guidance on best practices and outline of four key principles. The new Code and Bill are designed to work in unity.
The key principles are as follows:
The aim of the Code/Bill is to preserve viable businesses.
The preservation of the tenant's business should not be at the expense of the landlord's solvency.
A tenant should pay arrears where they can without delay.
Parties should transparently provide sufficient documentation so that the other party can understand their position.
The Code does not attempt to define the terminology 'viable' however, the crucial test is 'whether ring-fenced debt aside, the business has or will in the future have, the means and ability to meet its obligations and to continue trading'.
The Arbitration Process
A common problem with the previous Code was the tenant's failure to provide sufficient evidence of their inability to pay contractual rent or proposed concessionary rent. The new Code also removes the right to sue for arrears and brings all disputes within one procedural domain to help resolve all remaining matters.
The new Code sets out clearly how a tenant may provide sufficient evidence. This is through demonstrating why the payment is unaffordable and what payment or payment period might otherwise be affordable in the short term. Further, it provides a list of documents which can be used as evidence.
A key aspect to the new Code is that landlords and tenants are not obliged to negotiate rent concessions and either party can apply for the matter to be referred onwards to the binding arbitration scheme introduced by the Bill. The process will be split into the following stages:
Pre-Application - a letter of notification sent by either party including a proposal for the settlement of the arrears in line with the new Code.
Opportunity for the other party to respond to the letter.
Application for arbitration - including the original notification, proposal resolution and supporting evidence (viability and affordability in the case of a tenant)
14 days for the other party to submit their own proposal
Opportunity for the parties to request a public hearing or alternatively, for the arbitrator to assess the matter based on the documents provided.
The key objective of the Bill and new Code is to deliver a streamlined process for the remaining COVID-19 rent arrears.
What does the new Code mean for the landlord?
For landlords, the Government has removed their last enforcement option by closing the door on court proceedings for rent arrears. However, the new Code sets out an efficient test of the tenant's ability to pay and a unilateral application for arbitration allowing for affordability to be independently assessed. These measures ensure that the test for affordability will now be closely monitored as it is purposefully stricter than the previous Code. Lastly, post March 2022, non-ringfenced arrears will be subject to the usual enforcement measures which prevents tenants using existing measures to avoid payment of rent, despite their business being able to open and function.
What does the new Code mean for the tenant?
For tenants, their ability to pay will be subject to justified scrutiny and therefore, they are less vulnerable to strong-arm landlord tactics. However, tenants who might seek advantage of the Bill's safety net, despite being able to pay their rent, will not be able to hide as the arbitration process will require their full and honest disclosure of their financial position.
Concerns with the new Code
It will be interesting to view the level of demand for the new Code as tenants who are genuinely struggling may be put off by the expensive arbitration process. However, landlords may consider coming to a resolution sooner so as to also avoid expenses.
Before the Bill is given Royal Assent, landlords can still issue a money claim, but once the Bill is passed tenants can apply to pause that money claim if it relates to a debt to which the Bill applies. Additionally, the Commercial Rent Arrears Recovery process and bankruptcy petitions currently remain active.
To summarise, it must be acknowledged that the Bill is a powerful instrument as it would allow arbitrators to effectively rewrite pre-agreed leases and make awards that alter judicial decisions. It is important to note that the Bill and Code express that further guidance will be provided in due course, and that they are liable to change.
For more information contact Rebecca Davidson in our Housing & Regeneration department via email or phone on 01772220143. Alternatively send any question through to Forbes Solicitors via our online Contact Form.
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