Hospitality Business Owners Shouldn’t Bury Their Head On Debt Repayments

By Martin Edwards, partner and head of property litigation at law firm Shakespeare Martineau (www.shma.co.uk)

It’s no secret that hospitality faced a particularly tough time during the pandemic – being forced to close at multiple points for months on end, with many being unable to pay their rent as cash flow dried up. The moratorium on evictions provided a lifeline for many during this time, but now, new Government legislation has been introduced to settle matters related to arrears built up during the pandemic.

The Commercial Rent (Coronavirus) Act 2022 “CRCA” is intended to support landlords and tenants to resolve payment of commercial rent arrears that accrued during any part of the period 21 March 2020 to 18 July 2021 (or 7 August 2021 in Wales) when businesses were forced to close due to the various COVID -19 lockdown restrictions.

This will vary according to the type of business. Many tenants working in the catering and hospitality sector were forced to close completely at that time. For example, in England, the restrictions for nightclubs lasted for the whole of the above period.

This new law stops landlords starting any form of recovery or enforcement action against their tenants for these arrears at any time between now and 23 September 2022. But that does not mean business owners should bury their head in the sand.

Landlords and tenants are encouraged to use this new law to try to negotiate a solution between themselves which balances the landlord’s solvency whilst preserving the viability of the tenant’s business. If they cannot reach agreement, they each know they can then appoint an arbitrator who will decide the matter but acting on the same principles. The policy behind the new law is to preserve otherwise viable businesses and the jobs they support.

Arbitrators must find a way in which the parties can settle their differences and reach a binding agreement. This could potentially include giving tenants further time to pay or rent holidays etc.

Here’s a short guide as to whether a hospitality business might be able to qualify for protection under the new legislation:-
• It only covers rent that fell due during the period between March 2020 and July 21 (as above)
• Your business must have been forced to close completely for all or some time during that period
• Your Landlord hasn’t already started formal recovery action against you pre 25 March 2022 (when the new law came into force).
• You have not already reached agreement with your landlord for rent during this period.
• You must be able to show that your business was otherwise “viable” during that time – those businesses which are effectively already insolvent are not covered by this arbitration scheme.
• Starting the process does not necessarily mean you are bound to end up in front of an arbitrator – most disputes referred are expected to settle on terms being agreed between the parties.
• Check the Code of Practice for more details and guidance on how parties should approach negotiations – find it here:- https://www.gov.uk/government/publications/commercial-rent-code-of-practice/commercial-rent-code-of-practice-following-the-covid-19-pandemic#part-three-remedies-and-measures

Tenants should come prepared to the arbitration process with cash flow forecasts and accounts to prove that, through interventions such as a rent holiday for example, they’ll be able to pay their arrears in due course.

Anecdotally, it does not seem that many landlords are choosing to use the new law. They may be waiting until end of September deadline when they get their full enforcement rights back. But hospitality managers have an equal right to rely on these new provisions now.

Those tenants who qualify are fast running out of time to try to avoid future claims for these arrears. Particularly with many Q3 rent payments coming at the end of September, business owners who fail to seek arbitration by 23 September 2022 will likely be facing the perfect storm – landlords are then entitled to demand the new rent payment alongside any arrears amassed during the pandemic. There is no sign from the Government that the current deadline of 23 September 2022 will be extended. Once it’s gone, it’s gone. Arbitration offers a relatively fast, simple and affordable process to resolve these disputes.

With the cost of living squeeze likely to impact the hospitality sector this autumn, tenants can help themselves by engaging with their landlord now via this new arbitration scheme and in that way hopefully remove the risk of unwanted enforcement action when they least want it.