Pandemic Rent Debt – the next challenge: what can or should you do?
Landlords are currently prohibited from forfeiting leases for non-payment of commercial rent arrears built up during the pandemic. This moratorium is set to continue, when the Commercial Rent (Coronavirus) Bill becomes law and introduces an arbitration scheme at the end of March 2022. In the interim, the updated Code of Practice introduced in November 2021 already applies.
Many landlords and tenants have come to arrangements already but, for those who have not, they should be considering what they should and shouldn’t do now, in anticipation of the arbitration scheme. What they should not do, is bury their heads in the sand.
A lot has been written about what landlords cannot do – either now, or once the Bill becomes law, and the arbitration scheme becomes available. To summarise, the Bill (currently) provides for:
- An extension of the current prohibitions on:
- winding up petitions based on covid rent; and
- the use of commercial rent arrears recovery (‘CRAR’).
- The introduction of new prohibitions, whilst arbitration is available or ongoing, preventing landlords from:
- issuing court debt proceedings;
- drawing down on rent deposits; and
- requiring rent deposits to be topped up.
- Landlords are to apply any amounts paid by tenants to rent outside of pandemic rent period; and
- A prohibition on pandemic rent debt, which has been subject to arbitration, being included in a CVA, Scheme of Arrangement or Restructuring Plan, for 12 months from the arbitration settlement.
However, there are steps that can be taken by landlords both now, and going forward, despite both the moratorium and the imminent arbitration scheme. It is important that commercial tenants are also aware of the actions that landlords can take, and plan accordingly.
The key steps that landlords remain able to take both now, and potentially after 25 March 2022, include:
- forfeiting for other lease breaches; and
- calling on guarantees.
For a limited time, landlords can also:
- draw on deposits, (if that hasn’t already happened, and with an acknowledgment that it is unlikely to be topped up until October 2022, at the earliest);
- use CRAR now, but only if there are in excess of 554 days of arrears; and
- issue debt proceedings and statutory demands – but there is little merit to either as a statutory demand based on pandemic rent cannot currently be relied on to present a winding up petition and, when the arbitration scheme and the new prohibitions commence, any debt claims for pandemic rent will be automatically stayed.
If all else fails, landlords could start planning for arbitration now. This can best be done by raising (or repeating) requests for tenants’ financials and considering and making settlement proposals that are in line with the Code.
Clearly, if any of the above actions might be available to their landlord, then a commercial tenant should plan accordingly, in order to mitigate the potential risks and liabilities. For example, tenants might wish to identify and remedy breaches of lease – and they may also wish to start planning their own proposals for the arbitration.
In doing so, tenants should be realistic – if the concessions they seek are too great then:
- they risk causing the arbitrator to question whether the business is actually viable; and
- the tenant might prejudice their own business model if they have budgeted on an assumption of greater discounts than are actually achievable.
Indeed, the Government, the Bill and the Code are clear that the extended moratoriums and arbitration scheme will only be available if the tenant business would be viable, were relief given. Equally, though, this cannot be at the expense of the landlord’s solvency. The Code specifically states that:
‘We do not consider a fair outcome to require substantial borrowing or restructuring by either party.’
For this reason, it is not only tenants, but landlords too, who would be wise to consider their financial positions.
Where arbitration is available, one of the key issues that the arbitrator will be asked to consider, is the viability of the tenant – as well as the effect on the landlord of any concessions. It is therefore imperative that both landlords and tenants consider these issues in advance – which is something they should be doing in any event.
It is all very well the Government saying that landlords and tenants should not have to take on more debt (or restructure) in order to address pandemic rent arrears, but the unfortunate fact is that many businesses have already done just that.
For those businesses who took out loans to cover their liabilities throughout the pandemic (whether to meet rent payments, or a shortfall in rent receipts, or otherwise) the arbitration scheme will be of no assistance. Instead, those businesses may now be facing loan repayments that cannot be reduced under the arbitration scheme.
Ultimately, if any actual or potential liability (whether that be rent arrears, loan repayments or otherwise) will have an effect on the business, the key is to consider options and mitigating actions early. This is true not just for pandemic rent debts, but for the other challenges facing businesses in all sectors in the current environment – whether that be supply chain issues, staff shortages, inflation or interest rate rises (recent and anticipated).
The earlier that these issues are given consideration, and contingency plans made, the better the chances of restructuring and/or rescuing a business.
So, if pandemic rent debt is an issue (whether for a landlord or tenant), then by all means take action now where you can, and prepare for the arbitration scheme if necessary but also consider the wider implications for your business.
If you have any concerns, whether about COVID-19 rent debt and the proposed arbitration scheme, or other debts and business risks that have accrued or arisen during the pandemic, then please contact a member of our Restructuring team.