New laws and Code of Practice are being introduced by Government on Commercial Rent Arrears due to COVID-19 restrictions
Code of Practice and the Commercial Rent (Coronavirus) Bill
Earlier this month, the Government published a new UK-wide Code of Practice for commercial rent arrears arising through Covid-19 and has presented a Bill to Parliament ring-fencing arrears and creating a binding disputes arbitration procedure for landlords and tenants unable to reach an agreement on arrears. The Voluntary Code of Practice published in June 2020 that was compiled with Revo’s close involvement and widely supported by all leading industry bodies has been formally withdrawn as of 9 November 2021 and replaced with the new Code
The Voluntary Code of June 2020 was a recognised framework for agreeing Covid rent concessions, deferrals, and payment plans on arrears between the parties. Importantly, the Code encouraged parties to meet halfway and stressed the importance that buildings need to continue to be insured and safely maintained, and any service charges, insurance premiums, and not-for-profit costs need to be met in full by occupiers under leases. It was the accepted mechanism for negotiations and recovery of operational costs and a balance of reasonableness to counter the devastating impact on owners of the Coronavirus Act 2020 Section 82 legislation, which prevents landlords of commercial properties from being able to evict tenants for the non-payment of rent and was subsequently extended until 25 March 2022.
The new Code emphasises the requirement for tenants who can pay their rent, to do so. The obligation is on the tenant to demonstrate that they are unable to pay by passing two tests – their business viability and affordability. The Government sees the new measures strengthening the former Code by balancing protection for landlords and supporting those businesses most in need. The emphasis is strongly biased towards preserving, or restoring and preserving, the viability of the business of the tenant and the impact of coronavirus on the business of the tenant. The landlord is protected in so far as tenants will be required to pay in full and without delay once an award is made by an Arbitrator.
The legislation, once passed, will apply in England, Wales, and N Ireland to businesses subjected to COVID-19 lockdown. It provides for a system of binding arbitration for unresolved ringfenced arrears based on the principles of viability of the tenant’s business and affordability i.e. the tenant’s ability to pay. The arbitrator has the discretion to write down all debts accrued during COVID-19 business closures, whether or not described as rent. Whilst the former Code excluded occupational costs such as service charge and Insurance, the new proposals do not make this distinction and furthermore are extended to include rent deposits that landlords may have drawn down on since 21 March 2020; it is irrelevant when the drawdown happened.
Arbitration will only be available for unresolved ringfenced arrears. Ringfenced arrears are only those arising during the period from 21 March 2020 to the last day the property was required to be closed or the last day the property was subject to coronavirus restrictions. This is described as the “protected period”. The “protected period” will include mandatory closures and also periods where there were restrictions on use, e.g. restrictions on numbers or seated customers only.
The new Bill will now be subject to the usual Parliamentary scrutiny and may change as it makes its way through Parliament. Subject to that, it is currently expected to become law in March 2022.
The Code and the Bill are here.
This briefing is for general information purposes only and should not be taken as legal advice.