In the case of Poundland v Toplain Ltd, the County Court rejected the tenant’s request to incorporate a COVID-19 rent suspension clause into the terms of a commercial lease renewal. Background The landlord and tenant (Poundland Ltd) had...
In response to the COVID pandemic the government passed wide ranging legislation to protect business tenants from eviction for failing to pay their rent. The measures that were put in place are to come to an end on 22 March 2022.
However, businesses are still suffering from the brutal effects of the pandemic particularly where non-essential businesses were forced by the Government to close during periods of lock-down. As matters stand, rent accrued during periods of lockdown are still payable and there has been a number of high profile court cases where landlords have brought claims against tenants for failure to pay rent during the pandemic and where the court has decided that rent has remained payable throughout the pandemic including during periods where businesses have been forced to close.
On 9 November 2021 the Government introduced The Commercial Rent (Coronavirus) Bill (“the Bill”) and a new Code of Practice which is designed to deal with rent arrears that accrued due during lockdown. The intention is to “ring-fence’ those arrears so that landlord’s remedies in respect of those arrears remain suspended.
Ring fenced debts include rent, service charge and interest where the tenancy was “adversely affected by Coronavirus.” A business is adversely affected by Coronavirus where they have been required to close all or part of the business due to a requirement by the Government to close.
The ring fencing applies to debts accrued between 21 March 2020 (when the first lockdown was imposed) until the end of the restrictions in place for the relevant business. This will therefore be sector specific. For example, nightclubs were only permitted to re-open on 18 July 2021 in the UK so they will benefit for a much longer ring fenced period for other businesses such as restaurants which were authorised to open earlier.
If the Bill is passed, any court claims that include claims for ring fenced debts which are issued between 10 November 2021 and the Bill coming into force will be stayed. Landlords will also be prevented from issuing bankruptcy proceedings against a business tenant based on a statutory demand served on or after 10 November 2021 until the Bill comes into force.
It is the writer’s view that the Court is likely to accede to a tenant’s request to stay a claim that includes ring-fenced arrears even if that claim was issued before 10 November 2021.
The Government encourage landlords and tenants to try and reach agreement over ring-fenced arrears but if agreement cannot be reached either the landlord or the tenant can make an application to refer the dispute to arbitration. A referral must be made within 6 months of the Bill being passed.
It would appear that the arbitrator will not be legally qualified. Arbitrators will make a decision based on an assessment of the principles of viability and affordability and their decision will be binding.
The overriding objective is to use the binding arbitration process as a last resort. Landlords and tenants are expected to negotiate their way through to sharing the burden of commercial rent debts accrued during the pandemic. The Government has published new Code of Practice to set out principles which landlords and tenants will be expected to follow in negotiations to ensure transparency and collaboration, a unified approach, acting reasonably and responsibly and coming to a swift resolution whilst providing more stringent testing on a tenant’s ability to pay.
It is clear that the Government expects landlords and tenants to resolve the issue of ring fenced debts amicably. That is, of course, easier said than done particularly where they have been unable to reach agreement in the past year or so. But where agreement cannot be reached, it would appear that the Government do not wish the (already overburdened) courts to determine those issues but rather the disputes are to be resolved by arbitrators by what is intended to be a much simpler and speedy process. Rather than the courts who would determine the issue of payment of rent based on legal and contractual principles, the arbitrators will likely take a much more holistic view and take into account the financial position of the parties and the viability of the tenant’s business. It is hoped that this will result in a much fairer outcome for both landlord and tenant. Whether that is the case remains to be seen.
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Partner and Head of Property Litigation