By Helen Wheddon, Partner at Stevens & Bolton (www.stevens-bolton.com)
The effect of the pandemic on the hospitality sector is difficult to overestimate, especially given that the night time economy still remains closed.The government’s recent announcement of a nine- month extension to tenant protections over unpaid rent will, therefore, be a great relief to the industry.
WHAT DOES IT MEAN?
Now, landlords will not be able to change the locks to premises to forfeit a lease because of unpaid rent accrued since March 2020, nor can they exercise ‘Commercial Rent Arrears Recovery’, until 25 March 2022.This process allows goods to be taken from premises against the value of debt owed. Other insolvency measures continue to be restricted, such as winding up petitions or statutory demands for pandemic debt, although these protections currently only last until 30 September 2021.
With industry businesses now carrying billions of pounds of rental debt, the government has struggled with how to tackle this without interfering with existing contracts. It introduced a code of practice in June 2020 for the commercial property sector to address rental payments and best practice between landlords and tenants during the pandemic, but it has never been mandatory.Various legal challenges by tenants to paying rent during the pandemic under commercial leases have been attempted and failed. A well-drafted commercial lease will be clear that the rent still has to be paid – pandemic or no pandemic, trading or not trading – however harsh that may seem. Despite wide- spread engagement between landlords and tenants across all sectors on settling – and splitting – the rental bill, rental debts remain.
While the extension averts the cliff edge that loomed on 30 June, it is not without a catch and seems unlikely to be extended again.The government has been clear that businesses that can pay their rent should pay and engage with their landlords. Businesses will still need to address the unpaid rent bill even as they look ahead to 19 July. New legislation is promised for those landlords and tenants who cannot agree terms over the unpaid rent bill with a ‘binding arbitration’ process to be introduced.This will decide the question of what has to be paid and when, with the decision imposed on the parties. Rental debts might be ringfenced from action for periods of closure, but this leaves many difficult questions of businesses open but trading at limited capacity. It may follow the Australian model where landlords have shared some of the debt and long-term repayment plans may feature.All of this is to be decided by impartial third-party arbitrators.
Landlords can still draw down any unused rent deposits, or pursue guarantors or former tenants. Court proceedings for the rent owed as a debt has seen recent successes for landlords in securing summary judgments. While this option does not secure the cash itself, it might now be more attractive to landlords in light of the nine-month extension and trading businesses will not want judgment debts on their record for obvious reasons.
Beyond the government’s announcement two weeks ago there is no further detail of what this new legislation will involve.Without this it is not possible to say whether tenants are better off waiting for the detail of the legislation or agreeing terms now with their landlords where they have not previously. Further uncertainty is introduced by reports that landlord groups might be challenging the extension.
Industry businesses need to be aware that the extension does not fully protect them from landlord action nor does it remove the debt, and it is unlikely that any new binding arbitration will either. However, the legislation may include measures to restrict or put on hold debt action for pandemic rent arrears. Currently the insolvency protections will end on 30 September 2021, so 1 October is another important deadline. Engaging with landlords now to achieve certainty ahead of the detail of the legislation would seem a sensible move for tenants wanting to plan their recovery and invest in their businesses with certainty as we move on from the pandemic.