Commercial Rent Bill – What This Means for Landlords
The Commercial Rent Bill was passed on the 25th of March 2022, which sets out the next stage of recovering rent arrears for Business Tenancies. The Bill details what recovery methods are now available for Landlords to pursue the arrears that have accrued under tenancies that were not required to close during Covid-19 (non-protected rent) and the process necessary to recover rent arrears that occurred during mandatory lockdown periods (protected rent).
This Blog will be split into two sections and will look at recovery options for non-protected rent and protected rent.
Closure Periods
A timeline on the Government website details the mandatory closure periods that affected the United Kingdom and what businesses were affected.
Un-Protected Arrears
Prior to the Commercial Rent Bill being passed, Landlords were restricted from even recovering arrears that were accrued before Covid or during non-mandatory closure periods. However, this has now changed. Where a business tenancy has accrued such arrears, Landlords are now able to start recovery through several methods:
1. Forfeiture
2. Debt Proceedings
3. Commercial Rent Arrears Recovery (CRAR)
4. Statutory Demand
1. Forfeiture
Forfeiture is when a landlord will take steps to take back vacant possession of the property. In order for forfeiture to be used, the tenant must have breached one of the covenants in their Lease. This could be a breach of the repair covenants or of most interest in this instance if the tenant has breached their rent, service charge or insurance covenants.
To begin forfeiture proceedings, the Landlord will firstly need to issue a s.147 of the Law of Property Act 1925. This notice will stipulate a reasonable timescale for the tenant to try and remedy the breach, i.e., the tenant would clear the arrears on their account. If the tenant is not capable of the remedy, the Landlord is entitled to forfeit the Lease once the reasonable time period has lapsed.
To take back possession, once the reasonable time has elapsed, the Landlord can either choose to peaceable enter the property, where lawful to do so, or by issuing possession proceedings at court. The tenant can apply to the court for relief from forfeiture, which would be determined by the Judge presiding over the case.
2. Debt Proceedings
This form of recovery has not been restricted under the Coronavirus Act 2020 and allows Landlords to issue a claim under Part 7 or Part 8 of the Civil Procedure Rules.
Landlords can make a claim to the High Court to recover the arrears under the Lease. The Landlord will be required to pay an initial sum, depending on the amount they wish to recover. However, this payment can be recovered from the tenant if successful.
If successful, debt proceedings will mean a landlord can recover any rent arrears, service charges, or outstanding insurance payments. The High Court will allow the tenant to defend the claim; however, if unsuccessful, the High Court will issue a Court order, and bailiffs will be sent with a Warrant of Control to collect the money from the tenant within 7 days of receiving the notice from the court.
3. Commercial Rent Arrears Recovery (CRAR)
This recovery method is a statutory procedure that enables Landlords to recover the rent arrears by issuing an advanced notice to seize the tenant’s goods from their demise and selling them to cover the outstanding balance.
To start proceedings under CRAR, the rent needs to be outstanding for 7 days. A notice can subsequently be issued to the tenant, giving them 7 days’ notice of enforcement. Once the notice has been issued and the notice period has expired, Certificated Enforcement Agents may enter the premises (through an open or unlocked door) to seize the tenants’ goods.
It should be noted that there are some stipulations for the use of CRAR:
- Can only be used if the premises is only for commercial usage and not mixed with residential.
- This method can be used for rent recovery only and cannot be used to recover any service charge or insurance arrears.
- If this recovery method is chosen, exercised, but unsuccessful, the Landlord cannot proceed with forfeiture for the arrears. They can, however, wait until further arrears are demanded and remain unpaid and then use forfeiture.
4. Statutory Demand
A statutory demand is often issued via a written request to pressure the tenant to make payment of their outstanding arrears before more formal legal action such as winding-up petitions.
This is often a quicker method for Landlords seeking to take action for the arrears that have accrued and is often enough to recover the balance as most tenants do not wish to go through court proceedings.
Protected Rent-Arrears
For the Business Tenants who were required to close down under the mandatory lockdowns, there is now a clear path that all Landlords and Tenants must take to recover these arrears – arbitration.
Arbitration was brought in to provide a forum for negotiation between the Landlord and the tenant in relation to the unpaid protected rent debt.
There are three stages to the arbitration:
1. The pre-arbitration stage;
2. The eligibility stage; and
3. Resolving the matter of relief from payment
Stage One: The Pre-Arbitration Stage
Prior to an Arbitrator being appointed, both parties must follow the process for making a reference to arbitration.
Reference to Arbitration
Either party can refer the matter to arbitration; however, there are some circumstances where a reference cannot be made. This is when the tenant is subject to any of the following:
• A Company Voluntary Arrangement (CVA) that has been approved
• An Individual Voluntary Arrangement (IVA) that has been approved
• A scheme of arrangement or restructuring plan that has been sanctioned
If any of the above has been approved or sanctioned, then arbitration cannot progress; however, if the decision has not been approved or authorised, an arbitrator can be appointed, and the arbitration can proceed.
The reference for arbitration must be made within 6 months, beginning on (and including) the day the Bill was passed. With the Bill passing on the 25th of March 2022, the 6-month deadline is the 25th of September 2022. However, the Secretary of State may extend this period.
It must be noted that the reference should only be made to one of the approved arbitration bodies that the Secretary of State has set out. The list of approved bodies is below:
https://www.gov.uk/government/publications/apply-for-role-of-arbitration-body-to-manage-rent-related-disputes-process-and-form
Steps Taken Before a Reference is Made
The party looking to initiate arbitration proceedings must first notify the other party of its intentions to do so. The Government has recommended that the notification also offers a settlement to the other party to try and resolve the matter one more time before arbitration. The settlement is to be supported by any appropriate evidence in line with the behaviours, principles and documentation set out in the Commercial rent code of practice following the COVID-19 pandemic (the ‘Code of Practice’).
Behaviours to be Exhibited by Landlord and Tenant:
a) Transparency and Collaboration
a. Both parties must work together reasonably and with transparency to reach a conclusion that suits both parties and the business to enable the company to continue to run.
b) A Unified Approach
a. Both Parties must try and work together to help and support each other.
c) Act Reasonably and Responsibly
d) A Swift Resolution
a. Parties should act to avoid costly and burdensome processes and ensure that the disagreement is resolved as quickly as possible whilst negotiating the best resolution.
Once the notice has been served, the other party has 14 days from receipt to respond. In this response, it is also suggested that the party offers a settlement to try and resolve matters outside of arbitration. Once the notice has been served, the party initiating arbitration proceedings has 14 days from receipt of the response to make a reference to arbitration. If there is no response, a reference to arbitration can be made 28 days from the date the notice of intention was sent.
How to make a Reference to Arbitration
The applicant must give notice, in writing, to an approved arbitration body, requesting that the body appoint an arbitrator. There will be a fee to make a reference, and this will need to be made in advance of the arbitration taking place. If a proposal to settle has been issued, this must be included with the application, along with the supporting evidence.
Stage Two: The Eligibility Stage
The tenant must be under a Business Tenancy and have arrears that fall into the protected periods. If these are not met, the arbitrator will dismiss the case.
Under the Act, rent is defined as an amount consisting of one or more of the following amounts payable by the tenant to the Landlord (or a person acting for the Landlord, such as a managing agent) under the subject business tenancy:
• An amount payable in consideration for possession and use of the premises to which the tenancy relates, whether or not that payment is described as ‘rent’ in the tenancy
• An amount payable as a service charge
• Interest due on any unpaid amount of the above
To be adversely affected by Coronavirus for the Act’s purposes means that the business, in part or whole, that is carried out in the premises was subject to a closure requirement under coronavirus regulations.
The arbitrator needs to consider the viability of the tenant’s business. If they have determined that the company is viable or would be, if they were given some relief from payment, the arbitrator will move to Stage Three and resolve the matter of relief.
To determine the viability of the business, the tenant must provide evidence to the arbitrator, and the arbitrator must have regard for the following:
- The assets and liabilities of the tenant, including any other tenancies to which the tenant is a party;
- The previous rental payments made under the business tenancy from the tenant to the Landlord;
- The impact of Coronavirus on the business of the tenant; and
- Any other information relating to the financial position of the tenant that the arbitrator considers appropriate
Stage Three: Resolving the Matter of Relief from Payment
The arbitrator will determine whether the tenant should be given any relief from payment and, if applicable, make an award on the matter of relief from payment.
The initiating party must submit a formal proposal to resolve the matter of relief from payment and submit one revised formal proposal. The party being brought to arbitration may submit a proposal if they wish. The formal proposal will form the basis on which the arbitrator will resolve the matter.
The arbitrator must consider the final proposal or proposals by way of the arbitration principles. The outcome will depend upon the circumstances of the proposals. For example, should both parties submit final proposals and both are consistent, the arbitrator will make the award to the most consistent proposal. Equally, if only one party submits a final proposal and is not consistent, the arbitrator will consider offering an appropriate award by applying the principles.
The arbitrator needs to consider whether the tenant’s business is viable. They need to take into account whether the Landlord is solvent. The Landlord will be deemed solvent unless they are or are likely to become unable to pay their debts as they fall due. To assess this, the arbitrator will look at:
- the assets and liabilities of the Landlord, including any other tenancies to which the Landlord is a party; and
- any other information relating to the financial position of the Landlord that the arbitrator considers appropriate
It must be noted that a landlord does need to provide the arbitrator with the above information. If they believe that they are solvent and that the proposal would not affect their solvency, they do not need to provide the information.
Making the Award
The timing of the award will depend on whether the matter is considered with or without an oral hearing.
If there is an oral hearing, the arbitrator will be required to make an award within 14 days from the date on which the hearing concludes. If there is not an oral hearing, the arbitrator must make an aware as soon as reasonably practicable to do so.
Should you require any further information on these matters or wish for us to assist you in the arbitration or arrears recovery process, don’t hesitate to contact our Commercial Management Team.
Telephone: 02476 228 111 (option 4)