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What about the arrears?

20 August 2021. Published by Mike Kilner, Consultant

On 4 August 2021 the Government published a policy statement clarifying their announcement made on 16 June 2021 in relation to the extension of the forfeiture moratorium, the ringfencing of COVID-19 commercial rent debts and the introduction of a binding arbitration process. The Government has also published its own response to the views of over 500 respondents to the call for evidence.

Unsurprisingly perhaps the two most favoured options in the responses to the call to evidence were:-

(a) for all tenant protection measures to lapse on 30 June 2021 (89.5% of responding landlords were in favour of this option); and

(b) the introduction of a scheme of binding arbitration to resolve rent debt (66.3% of responding tenants were in favour of this option).

From the responses it appeared that the voluntary nature of the existing Code of Practice was making it too easy for parties to simply ignore it and refuse to co-operate.  The policy statement confirms the Government's commitment to introducing a stronger Code of Practice and a binding arbitration process where negotiations fail.

The policy statement made on 4 August is light on detail but the Government confirmed that legislation to ringfence debt accrued by commercial tenants who have been affected by COVID 19-related business closures and introducing a binding arbitration for dealing with such debt will be introduced in the current parliamentary session (so by spring 2022). The ring-fenced debt will be for the period from March 2020 until restrictions for their relevant sector were removed.

The policy statement makes the following key points:-

  1. The moratorium on forfeiture will continue until 25 March 2022 unless further legislation is passed in the meantime.  This therefore introduces the possibility that such date could be brought forward or pushed back depending on how matters progress.
  2. Tenants who have not been affected should continue to pay.
  3. Tenants who have been affected should be paying in full from when restrictions were lifted.  Tenants should specifically apportion rent payments and make it clear to their landlords what period any payments relate to.
  4. When the legislation comes in, landlords will be able to forfeit for non-payment of rent that fell due prior to March 2020 or for a period after any relevant restrictions on opening were lifted.
  5. A more stringent and mandatory Code of Practice will be introduced setting out the principles the Government expect parties to adopt when negotiating.  The new Code of Practice and the principles will be published prior to the arbitration scheme becoming effective in order that parties have time to negotiate.
  6. Landlords and tenants acting in good faith and in accordance with the principles in the Code of Practice will be expected to share the costs of any arbitration.  Arbitrators may be empowered to order a party to pay all of the costs of the arbitration if they do not act in good faith or otherwise in accordance with the principles in the Code.

What is clear from the policy statement is that the Government wants the parties to negotiate and sees the arbitration process as a matter of last resort.  Clearly the Government are hoping that by publishing the revised Code of Practice and the principles prior to introducing the binding arbitration, the vast majority of rent arrears will be dealt with without the need of an arbitrator.  If all of a tenant's revenue was generated from shop-based sales and its shop was legally required to close due to COVID 19 with the tenant receiving no revenue until the shop is permitted to open then it seems that a landlord may well be expected to waive at least some of the rent for this period.  Quite how considerations about on-line sales or fluctuations in sales throughout the different periods will be factored in remains to be seen.