Commercial rent arrears during the COVID-19 Pandemic – Tenants’ Lifeline Extended to March 2022

Both landlords and tenants of commercial property have spent the last few months anticipating what the government will do next in relation to the recovery options for rent arrears that have been restricted since March 2020 as a consequence of the COVID-19 pandemic. To assist with the outcome, in May 2021, the government invited interested parties to put forward their views on how the recovery options should be reinstated.

On 16 June 2021 the government provided an insight on what the future holds.The government's announcement has provided tenants with further reassurance by confirming that there will be continuing breathing space for businesses which had to remain closed during the pandemic and as a result are unable to pay their rent. However, the announcement does make it clear that tenants should continue to pay their rent where they are able to do so. The main headlines are:

• The ban on forfeiture for failure to pay rent will be extended to 25 March 2022. The definition of “rent” does not just mean annual rent, but also includes any amounts payable under the lease, including service charge and insurance. It must be noted that a landlord’s right to forfeit for non-payment of rent is specifically preserved and cannot be waived unless such waiver is given expressly in writing. This means that landlords will be in a position to take immediate forfeiture action when the restrictions are lifted in respect on unpaid rent should they wish to do so.
• The restrictions on using the Commercial Rent Arrears Recovery procedure (“CRAR”) are also to be extended from the current position, which stipulates that the landlord can only use CRAR if the tenant is in arrears of more than 457 days, rising to 554 days from the next quarter day on 24 June.
• The moratorium on serving statutory demands and issuing winding up petitions are both to be extended to 30 September 2021.
• Landlords are still able to take steps to enforce tenants’ liability under the lease, by means of contractual enforcement or debt recovery action via the issue of court proceedings.
• Landlords are still not able to rely on the tenant’s failure to pay rent during the pandemic as a reason to oppose the renewal of the lease under the Landlord and Tenant Act 1954,
• The legislation does not apply to very short term leases which were granted for a term of less than 6 months.

Going forward, it is expected that any arrears will be ring fenced where they have accrued as a direct result of the pandemic. The government also intends to introduce legislation to help both landlords and tenants to come to an agreement regarding vast rental arrears through a new "binding” arbitration process. It has not yet clarified how this process is to work. There is an opening suggestion that tenants will be encouraged to prioritise payment of new/future sums of rent whilst having an extended form of protection against landlord action to recover the ring fenced pandemic arrears.

We await the exact details in a draft Bill, but in the meantime all we can do is speculate on how such a process will work, particularly when there is a negotiated lease in place between the parties which has already made provision for the consequences of non-payment of rent. Whilst many tenants will have celebrated this news, it is another hammer blow for many landlords whose rights to recover unpaid rent have been severely curtailed since March 2020.  With landlords still having the right to issue court proceedings in respect of these unpaid sums and the recent favourable decisions in landlords’ favour, we consider it highly likely that if tenants continue not to engage, a number of landlords may well decide to issue claims seeking judgment for the arrears.  As such, tenants would be well-advised to continue to engage with their landlords and seek to agree a way forward if possible, particularly as the government guidance leaves parties in no doubt that they should be working together to resolve the position as far as possible.