Blog:

Commercial Rent Arrears -
The Government's call for evidence

21 May 2021

The Government has been consulting widely with regard to commercial rent arrears in an effort to establish what, if any, barriers exist to productive negotiations between landlord and tenant. The Government has made clear that it will consider both regulatory and legislative options to protect viable businesses and jobs.

 The options currently under consideration

  • Option 1 – allow these measures to expire on 30 June 2021
     
  • Option 2 – Allow the moratorium on commercial lease forfeiture to lapse on 30 June 2021 but retain the insolvency measures and additional rent arrears amendments to CRAR for a period
    of time
     
  • Option 3 – Target existing measures to businesses based on the impact that COVID-19 restrictions have had on their businesses for a limited period of time 
     
  • Option 4 – Encourage increased formal mediation between landlords and tenant
     
  • Option 5 – Non-binding adjudication between landlords and tenants
     
  • Option 6 – Binding non-judicial adjudication between landlords and tenants.


Preventing a “cliff edge scenario”

We have considered the options as put in the consultation. Our ideal outcome would be to see all measures extended to the end of September 2021, to allow a protective bubble wrap over the summer, to not destroy the benefits the protections have provided thus far and given the increase in COVID-19 variants and potential for continuing social restrictions.

Option 2, therefore is the most equitable option by best balancing the rights of landlords and tenants and preventing a “cliff edge scenario” which could result in the failure of viable businesses particularly in those sectors most affected by the pandemic. The Government has always been clear that tenants who are able to pay their rent in full should do so, whilst those businesses that cannot should communicate with their landlord and pay what they can. However, it is said that some national businesses have taken advantage of the protections afforded to tenants and have not paid property costs in line with their contractual obligations when they are able to do so.  It is logical to conclude that an easing of some of the protections in place will result in those businesses that can afford to pay, paying their obligations.

Bringing parties to the table

Of the Options set out Option 2 continues to provide tenants with needed protections from winding-up petitions, but recognises that landlords cannot (and should not) be forced to standstill indefinitely following the reopening of the economy. By 30 June many businesses will have been operating for nearly two months and viable businesses should be on the road to recovery.  At this stage, it is reasonable that tenants should start paying ongoing rents and where possible contributing to built-up arrears. By keeping certain of the most serious remedies otherwise available to landlords stayed, , tenants are not at the mercy of landlords and both sides are incentivised to reach a mutually acceptable solution to both rent arrears and future rental stream. It must be reasonable to expect that once forfeiture rights have been reinstated, those tenants who, to date, have failed to engage with their landlords are more likely to do so and “come to the table” in an attempt to seek a negotiated settlement regarding COVID-19 rent arrears. Many landlords would much prefer to keep their existing tenants, but need at least some rental stream from the properties and would be willing to renegotiate terms that are acceptable to both sides. Therefore in our view, of the six options Option 2 is the most balanced, allowing a degree of ongoing breathing space for discussions to be completed that the other options do not.

Why the other options are less balanced

Specifically, Option 1 is too landlord friendly and will likely result in a significant failure of viable business with landlords issuing winding up petitions for unpaid arrears. This could result in a flood of liquidations and may force businesses to seek to implement a CVA or pre-pack or restructuring plan perhaps coupled with a moratorium, rather than reaching an agreed consensual solution with their landlords.

Option 3 would require an assessment of which businesses are affected and entitled to protection and is likely to be open to debate, particularly in portfolio estates where some units may perform better than others.  The resulting uncertainty will not be helpful.

Option 4 (mediation) and Option 5 (non-binding adjudication) are both time consuming, potentially costly and do not themselves result in a binding solution. Landlords and tenants have had over a year to reach a negotiated agreement and were encouraged to do so through the Government guidance.  Again relying on that as a solution without otherwise changing the dynamics will not result, in most cases, in any improvement over the current situation and is likely to lead to both sides incurring costs. The fact that Landlords will be able to take forfeiture action under Option 2 is in our view more likely to result in tenants coming forward
with proposals.

Option 6 does have the benefit of being binding, but will likely come at a substantial cost to both tenants and landlords, who will both be seeking to avoid unnecessary expenditure while they navigate the reopening of the economy. This combined with the time and government effort that would need to go into establishing this adjudication process can only result in the view that government funds are better spent otherwise.

Reaching a fair solution with the best of the presented options

The period for consultation has now expired. We understand that the BPF and the BRC have both called for pandemic arrears to be ring-fenced and subject to an extra six months of protection. If after this time they fail to reach an agreement the parties would have to submit to binding arbitration. Under both their proposals tenants would be required to pay ongoing rents. Neither proposal is one of the options under consultation but is a variation of Option 6. It could be viewed as largely putting off today’s problem until tomorrow.  Under Option 2 forfeiture is an immediate threat focussing the mind of the tenant pushing them to seek to reach a consensual outcome. While we appreciate that there may be agreements between landlords and tenants in this 6 month period proposed by the BPF and the BRC, we can’t see the benefit in extending the period of uncertainty for an additional 6 months. In particular, where businesses have been able to trade throughout rental arrears should be brought up to date or evidence provided to support a concession.

The UK economy is slowly recovering and we should be ushering that recovery along by bringing people to the table sooner rather than later.  In our view Option 2 best achieves this goal as it will drive dialogue between the parties. In the event that a tenant is truly unable to pay the arrears in full they will either seek to reach a consensual deal or have no alternative but to restructure by way of one of the available restructuring processes. We are of the view that Option 2 provides a fair balance between interests of both the landlord and the tenant. We wait with interest to see the route Government decides to take.

If you would like to discuss any of the points raised in this blog please contact Sarah Rayment and
Elizabeth McGovern.