The word unprecedented has rightly been used to describe many things in the last couple of years. The level of financial support provided to UK plc during the pandemic is one of those things, allied to this within the restructuring sphere was the restrictions placed on creditor action to help protect businesses during the pandemic.
The argument that by targeted protection of one business you may be stifling another, is no better seen than in a landlord / tenant scenario, with enforcement in respect of Covid-19 rent arrears having been prevented for a period extended multiple times.
But now that 25 March has come and gone without a further extension to these restrictions, landlords in theory now have access to all of their available remedies for non-payment of future rent.
However, what about the remaining commercial rent arrears (including service charge, insurance and VAT due under leases) built-up during the pandemic, estimated by the Treasury to be an astonishing £9bn?
In order to try and support a solution for some of these arrears, where landlords and tenants cannot consensually agree on a solution, new laws and a code of practice have now been enacted to help, under The Commercial Rent (Coronavirus) Bill, which has established a binding arbitration system to resolve disputes on “protected rent” potentially reducing or restructuring the amounts owed (tenants who can afford to pay their rent in full should do so and will not qualify).
The process is expected to take 65-90 days from instigation by either party and is available for six months. The arbitrator’s decision is binding but can then be appealed to the High Court within 28 days.
There is some scepticism as to how successful it will be or how much it will even be utilised, and how some of the criteria will be applied, in particular, that relating to preserving the tenant’s viability but not at the expense of the landlord’s solvency. Ultimately, it will be a balancing exercise for the arbitrator to determine any rent reduction using the guiding principles.
Its effectiveness may be better judged not by its actual utilisation, but by the impetus for tenants and landlords to reach a consensual resolution without the need to actually use an arbitrator, at some cost, particularly given some of its limitations set out below.
This is rent that remains owed by a tenant who were mandated to close their premises or cease trading in whole or part, for that time only, within the period of 21 March 2020 to the last date of restrictions.
Unsurprisingly given the physical restrictions that have been imposed at various stages over the last two years, data suggests that pubs and bars, restaurants, clothes retailers and hotels owe the most rent. The mandated closure periods, which largely effected these sectors and types of business, did vary and tenants looking into arbitration as a solution should check carefully the period(s) which apply to them.
The protected rent period could be quite limited in practice, with it not taking in to account the impact of the patchwork tiered system across UK regions, or circumstances that led to the operator to make a choice to remain closed, such as shortages of stock or staff, or social distancing restrictions on trade deeming opening not to be viable at the time.
Rent due from those businesses that chose to close when they weren’t forced to by government restrictions is not protected, with debt proceedings like forfeiture, Commercial Rent Arrears Recovery (CRAR) and the winding-up process now available again to landlords for these arrears.
Payments already made will be applied to ‘non-protected’ rent unless otherwise agreed by the parties.
The upshot is that the arbitration process is administratively complex, has limited scope, is likely to be operationally disruptive and cause a deterioration in relationship between tenant and landlord.
Even though the moratorium measures have now ended and if relations have been strained, there is still time for further dialogue to try and reach a consensual agreement encompassing a broader solution taking into account full rent arrears, more complex and specific issues faced by tenants, and working in the better long-term interests of both parties. Or if necessary, a wider restructuring process may be more appropriate, such as a CVA, Scheme of Arrangement or Restructuring Plan.
Whether or not arbitration is the choice that’s right for your business (as a tenant or landlord), being in a position of financial distress may be unfamiliar territory.
So, involving outside experts with the relevant experience to explain your options, support management decision-making and project manage actions by articulating and bringing credibility to an arbitration or any restructuring process, remains key.
To find out more with regards the arbitration process, including details of the relevant dates, see Commercial Rent (Coronavirus) Bill 2021-22 - House of Commons Library (parliament.uk)
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