The ‘end’ of commercial rent arrears restrictions? Not yet…
Despite pandemic rent arrears purportedly being in the region of £9 billion, landlords were – until 25 March 2022 – prevented from taking any enforcement action against tenants of commercial premises. That is no longer the case: the general moratorium on commercial evictions has now come to an end (along with some other restrictions) and, from 1 April 2022, the prohibition on presenting a winding-up petition based on unprotected commercial rent arrears will also come to an end.
However, certain pandemic rent debts remain ringfenced, as a result of the Commercial Rent (Coronavirus) Act, which refers to such arrears as ‘protected rent debt’. Frustratingly for landlords, such protected rent debt is now subject to new, temporary moratoriums on enforcement – including wider restrictions than previously. These restrictions accompany a new, binding arbitration scheme, which was announced on 9 November 2021, and is now in force. For further detail of which rent debts are ringfenced, and the arbitration scheme, please see here.
Accordingly, whilst landlords of commercial property are now entitled to bring enforcement action in respect of any rent arrears that are not protected rent debt, any arrears relating to periods of pandemic-related forced closure can, for now, only be resolved via arbitration.
Whilst the arbitration scheme is available, the Act prohibits the following actions:
- the presentation of Winding Up Petitions;
- the presentation of Bankruptcy Petitions;
- enforcing Money Judgments;
- bringing new debt claims;
- forfeiture or re-entry;
- commercial Rent Arrears Recovery (‘CRAR’);
- drawing down on Rent Deposits;
- appropriating tenant payments against protected rent debt;
- conventional Arbitrations; and
- tenant restructuring proposals are also affected by the arbitration scheme.
Tenants will only benefit from these restrictions whilst the arbitration scheme remains available – and the scheme can only be utilised by tenants who:
- have a ‘business tenancy’, to which Part II of the Landlord and Tenant Act 1954 applies;
- have been ‘adversely affected by coronavirus’; and
- have a business that would be viable, were it not for the liability for protected rent debt.
As such, the question of ‘viability’ will be key to the arbitration process, and the level of relief that tenants may be able to secure.
Neither the Act, nor the accompanying Code of Practice, contain a definition of viability, as the Government accepts that whether or not a business is viable will vary depending on the vast array of different business models both within and between sectors.
Instead, the Code of Practice states that there should be consideration of whether,
‘ring-fenced debt aside, the business has, or will in the foreseeable future have the means and ability to meet its obligations and to continue trading.’
Further, guidance for prospective arbitrators states that,
‘if a business took on more debt to become viable for the purposes of arbitration … they would likely be delaying the problem and risking their long-term viability.’
What the Act does state is that, when assessing the viability of the business of the tenant, the arbitrator must have regard to:
- the assets and liabilities of the tenant, including other tenancies,
- previous rent payments from the tenant to the landlord;
- the impact of the pandemic on the business of the tenant; and
- Any other information relating to the financial position of the tenant, that the arbitrator considers appropriate.
The guidance for arbitrators includes a long (non-exhaustive) list of the types of financial information that a tenant may wish to provide by way of evidence of their viability (if they are relieved from liability for protected rent debt). Knowing which financial information to rely on, and how to deploy it, will be key in supporting arguments both as to whether a business is viable, but also as to the level of relief that is required. Indeed, the Code indicates that
‘Where a viable tenant is seeking to deviate from the terms of the lease in respect of rent owed, they will need to demonstrate why the payment is unaffordable and what payment or payment period might otherwise be affordable in the near future.’
This sort of exercise – considering financial information in order to demonstrate viability and affordability – is something with which restructuring professionals (and particularly insolvency practitioners and accountants) are particularly experienced. Similar reports are often commissioned in order to support (or understand) applications for borrowing, and it should therefore be a relatively easy and straightforward task for restructuring professionals to produce a report on viability and affordability (or otherwise): they are certainly best placed to advise on the same.
It will therefore benefit both tenants and landlords to liaise with restructuring and insolvency professionals when considering the questions of viability and affordability. This is particularly the case given that the arbitration scheme provides for ‘pendulum arbitration’: the arbitrator has to award whichever proposal (from landlord or tenant) he considers is most consistent with the arbitrator’s principles laid down by the Act. Only if neither proposal accords with the principles, can an arbitrator award alternative relief in an amount that the arbitrator considers appropriate.
As such, it may be that arbitrators themselves also wish to seek advice on tenant viability – and potentially also with regard to the solvency of the landlord.
solvency of landlord
The Government has always been clear that any relief to be awarded through this new arbitration scheme will only be appropriate so long as it is ‘consistent with preserving the landlord’s solvency’.
A landlord will be considered to be solvent unless it is, or is likely to become, unable to pay its debts as they fall due. In assessing that question, the arbitrator must:
- have regard to:
- The assets and liabilities of the landlord, including other tenancies, and
- Any other appropriate information about the financial position of the landlord.
- arbitrators must also disregard the possibility of either landlords or tenants borrowing money or restructuring their business in response to the protected rent debt, and any relief.
Landlords who argue that relief proposals are unfair or unsustainable for their business, will therefore have to demonstrate the extent (if any) to which relief granted to the tenant might threaten the landlord’s solvency.
Whilst landlords of commercial property are now entitled to bring enforcement action in respect of any rent arrears that are not protected rent debt, the introduction of the arbitration scheme will, for now, frustrate their recovery of protected rent debt.
Where arbitration is commenced, whether by landlord or tenant, the key to a successful proposal and use of the arbitration scheme will be the ability to demonstrate (and evidence) the level of relief (if any) required in order to restore or preserve the viability of the tenant’s business, without prejudicing the solvency of the landlord.
Understanding and explaining the viability of the tenant’s business, and pitching the proposal accordingly, is therefore going to be key to securing an advantageous outcome.
If you have any queries arising from this article, the Act, the Code or the arbitration scheme, or about viability and/or solvency generally, please contact David Williams in BDB Pitmans’ restructuring and insolvency team.