The Commercial Rent (Coronavirus) Act is a new piece of legislation drafted by the government to enable 'relief from payment of certain rent debts under business tenancies adversely affected by Coronavirus'. The act came into force on the 25th of March 2022.
The bill allows rent arrears that fell due under certain tenancies to be 'ring-fenced' if they relate to periods of time during which the tenant's business was subject to mandatory COVID-19 closures. Landlords cannot reclaim these protected arrears through the usual means and instead must go through an arbitration process to split the cost fairly with the tenant.
The arbitration scheme applies in England and Wales, although other parts of the Commercial Rent (Coronavirus) Act apply to Scotland and Northern Ireland.
In this guide, our renowned commercial property litigation team have answered some of the key questions relating to the Commercial Rent (Coronavirus) Act. For any further information or assistance, please get in touch to speak to our commercial property experts.
The arbitration scheme applies only to commercial landlords and tenants who have a business tenancy that falls under Part II of the Landlord and Tenant Act 1954, and will only consider rent arrears that have been 'ring-fenced' in line with the Commercial Rent (Coronavirus) Act. This means rent arrears that relate to periods in which the tenant's business was forced to close due to the pandemic.
Under the Commercial Rent (Coronavirus) Act, independent arbitrators will help commercial landlords and tenants to find a fair balance in resolving COVID-19 rent arrears. Both parties are required to submit proposals to the arbitrator as part of the arbitration process. The arbitrator will review the proposals and make an award based on whichever proposal the arbitrator considers to be the most consistent with various principles.
Any award under the arbitration process should be mutually beneficial, with the aim of preserving or restoring the viability of the tenant's business, so far as is consistent with preserving the landlord's solvency. Put simply, any award should allow a tenant to continue to operate their business without putting the landlord's financial solvency at risk. When an agreement is reached, the tenant should meet their obligation to pay protected rent in full and without delay.
When coming to a decision on an award, the arbitrator will consider elements that affect the landlord and the tenant. Below you'll find some of the considerations an arbitrator will make.
When considering the viability of the tenant's business and the landlord's solvency, the arbitrator will disregard anything done by either party to manipulate their financial affairs into a more favourable position. This is to ensure that neither the landlord nor the tenant can influence the outcome of the award.
As part of the arbitration process, the arbitrator will look at the viability of the tenant's business. If, after assessing the viability of the tenant's business, the arbitrator determines that (at the time of the assessment) the business is not viable and would not be viable even with relief from payment, then the case will be dismissed from the arbitration process.
An arbitrator will deny entry to the arbitration process if the parties have already entered an agreement to resolve the issue of the ring-fenced rent debt before the reference to arbitration was made.
The arbitrator can make an award that involves writing off the whole or part of the debt. Alternatively, the arbitrator may give time to pay the whole or part of the debt, including permission for it to be paid in instalments. The arbitrator can also reduce any interest payable by the tenant.
The Commercial Rent (Coronavirus) Act affects landlords in a variety of ways, depending on their circumstances. We've covered a few potential scenarios below, but please contact our commercial property litigation experts if you have any further questions.
An ongoing lease is not affected by entering the arbitration process. If a landlord wants to offer the lease to a more financially secure tenant, they would first have to terminate the existing lease by the usual means (for example, by forfeiture or operation of a break right).
If the lease has expired and does not have the protection of the Landlord and Tenant Act 1954, the tenant has no right to remain in occupation, whatever the arbitration status. In such circumstances, the tenant will be required to leave the premises and the arbitration process will continue after the tenant has vacated.
If the lease has the protection of the Landlord and Tenant Act 1954, it will only come to an end when it is terminated in accordance with one of the methods prescribed by that Act. Until the lease is properly terminated the landlord must allow the tenant to remain in occupation.
An ongoing arbitration process does not prevent a landlord from selling the property. However, the arbitration would have to be disclosed to the purchaser and an ongoing arbitration may put off some purchasers.
The landlord has a contractual right to recover the arrears from the tenant. If the landlord sells the property, they will have to agree with the purchaser whether they are to retain the debt (and pursue in their own capacity), or whether the purchaser will be assigned the right to pursue the debt. If the purchaser takes an assignment of the arrears they will have to make an application to be substituted as a party to the arbitration proceedings.
If you are selling or purchasing a commercial property with protected rent arrears, speak to our team today by clicking the button below.
Arbitrators are only required to deal with the case which has been referred to them; they are not required to consider other cases, including what other arbitrators have determined regarding the viability of the tenant's business or what payments the other arbitrators have determined should be paid to the landlord and over what period.
Tenants will also be affected by the Commercial Rent (Coronavirus) Act in a number of different ways. As with landlords, we've put together a few scenarios below. To discuss these issues further, please contact us today by clicking the button below.
If the lease has not expired or been terminated, the tenant will remain liable for the covenants under the lease, regardless of whether they remain in situ or not. This includes obligations in relation to the condition and upkeep of the property, as well as paying sums such as annual rent, service charge and insurance rent which are due and owing.
If circumstances arise which allow the rent suspension clause to be exercised, the parties can still agree to the suspension of rent whilst the arbitration process is ongoing.
A tenant is not required to remain in situ by virtue of an ongoing arbitration process. If their lease has come to an end (for example, if it has expired or a break right exercised) they will be required/entitled to vacate the premises and the arbitration process can still continue.
Any ring-fenced debt that has been referred to arbitration cannot be included in a restructuring of the tenant's business (a CVA, for instance) for a period of 12 months after the conclusion of the arbitration process.
The Property Litigation team at Myerson Solicitors are experts in handling property-related issues, including those stemming from the Commercial Rent (Coronavirus) Bill.
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