Reed Smith Client Alerts

Against the backdrop of the current restrictions in place regarding action by landlords against commercial tenants (forfeiture and commercial rent arrears recovery are restricted until 25 March 2022 and insolvency restrictions are in place until at least 30 September 2021), the government has announced plans to introduce new legislation to assist tenants further, by addressing backlogs of arrears dating back to 25 March 2020.

Authors: Brad Trerise

While no date has been announced for the new legislation yet, the aims of the legislation are as follows:

  • To ringfence commercial rent arrears dating back to March 2020 which accrued as a result of COVID-19 related business closures. This means that, even after restrictions are lifted in 2022, action such as forfeiture or insolvency proceedings cannot be taken in respect of such arrears, only against prior or subsequent arrears. The extent of the arrears which will be ringfenced is unclear at this stage – we don’t know whether ringfencing will relate solely to periods when businesses were unable to open due to government lockdowns or whether it will be wider than that and relate to periods where businesses were able to open but were quieter due to social distancing measures (particularly in the leisure and hospitality industry) or where there was generally reduced footfall.
  • To ensure that tenants who are able to pay rent do so, rather than simply stating they can not do so due to closures. It is possible a financial test could be introduced in this regard to ensure tenants who can pay are not benefiting unjustly from the legislation.
  • Landlords and tenants will be expected to negotiate in respect of arrears and landlords are expected to “share the financial burden” as well as consider deferrals and waivers to reach agreement.
  • Where agreement cannot be reached, binding arbitration will need to be undertaken, as a last resort. While we still have no detail on the proposed arbitration process, it is envisaged that arbitrators will be able to make costs orders against parties who are found to have not “negotiated in the spirit of the legislative principles”.

Many instances of historical arrears have now been settled, whether by payment plans or lease re-gears, but it is worth keeping the above in mind if negotiations have proven fruitless to date. As a point to note, the new legislation will not affect any agreements which have already been made between landlords and tenants and debt claims remain a viable option, at least until the new legislation is enacted.

It remains to be seen exactly how arbitration will operate in practice, but it will be interesting to see how far the new process favours tenants as opposed to landlords, based on the government’s approach since March 2020.

Client Alert 2021-240