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Lockdown rent: should hospitality businesses be forced to pay the bills?

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In June 2021, at the same time as announcing that the extension to the ban on commercial evictions and commercial rent arrears recovery would continue until 25 March 2022, the Government announced that new legislation would be implemented to “ring fence” commercial rent arrears accrued by businesses affected during periods of enforced closures during the various COVID-19 related lockdowns. 

As a result of these restrictions, landlords have, since the start of the pandemic, found their remedies severely curtailed in the face of a non-paying tenant (whether that non-payment is deliberate or as a result of genuine hardship) and unable to compel a tenant to pay.

In August 2021, the Government published a policy statement giving more (although not a lot more) detail about how its plans to legislate to deal with lockdown rent arrears.

It is understood that the ringing fencing of arrears is to be sector specific and most likely to be most relevant to business such as bars and nightclubs who have been unable to trade at all since the first lockdown in March 2020. Businesses that can pay rent should do so but landlords and tenants are expected to share the financial burden caused by the pandemic and defer or waive the payment of rent. However, the fact that the policy statement specifically refers to businesses being “affected” presumably leaves the door wide open for those business who have been able to trade but in a more limited manner (such as a restaurant only able to provide a take away service during lockdowns) to take advantage of ring fencing.

Since the outbreak of the pandemic, the Government has encouraged landlords and tenants to work collaboratively to resolve issues of arrears but it seems that it now intends to force a resolution if negotiations do not result in agreement by introducing a process of binding arbitration. 

The Government guidance remains vague and it is unclear precisely how the system is intended to work but the process of arbitration is seen as a last resort where parties are unable to reach agreement. 

In general terms, arbitration is often faster, less complex and cheaper than litigating through the courts which are already clogged up with claims by tenants for unpaid rent.

The costs of the arbitration are be shared by both landlord and tenant provided that both parties have negotiated in good faith. Arbitrators have powers to award costs to either party where it is clear they have not negotiated in the spirit of the principles set out in the Code of Conduct published by the Government in June 2020 which is set to be given legislative effect. 

It is unclear, however, how the Government will be able to ensure consistency between arbitrators unlike judges trained in the application of legal principles. That said, a surveyor or some other professional with experience of business may well be much better placed to judge the impact of the pandemic on a business than a member of the judiciary

However, until the Government put some more skin on the bone, the issue of payment and enforcement of COVID-19 rent arrears remains unclear. Landlords are still free to sue tenants (and guarantors) for non-payment of what will, in due course, be “ring fenced” arrears and the proposals to “ring fence” seem to contradict a series of High Court decisions handed down during the pandemic where the court has made clear that the obligation to pay rent during periods of lockdown is unaffected by forced closures and remains payable in its entirety.

It is unequally unclear how, if, or to what extent the arbitrator is to have regard to the effect of the pandemic on the landlord whether or not the landlord has itself suffered financially as a business during periods of enforced closures or otherwise.

The system appears to only be designed to deal with arrears accrued during previous periods of lockdown (not further lockdowns should they take place although expect this to be legislated) and has no regard to the continuing damage caused by those lockdowns and the pandemic generally on business which, in the grand scheme of things, may be far more damaging to a vulnerable tenant as it tries to trade its way out of the pandemic.

An arbitration award will, however, be a blunt weapon unless the Government allows landlords to enforce them which would, in itself, have the effect of undoing the purpose of the legislation being a clear intention to protect vulnerable tenants impacted by the pandemic.

Months have passed since the policy statement was published and it is unclear when or if more detail will be given before legislation is enacted. However unsatisfactory it is, it is simply a waiting game. In the meantime, Government has maintained the status quo and ensured that tenants cannot be evicted for non-payment of rent until 25 March 2022 at the earliest unless legislation is enacted in the meantime.

For more information, please contact Steven Ross, Partner Property Litigation, at steven.ross@haroldbenjamin.com

Lockdown rent: should hospitality businesses be forced to pay the bills?

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