By It’s been just over a month since the government ended the temporary restrictions on landlords’ right to forfeiture a commercial lease for non-payment of rent, meaning commercial landlords are once again able to regain possession of premises or recover sums owed from tenants through numerous methods.
Forfeiture is a right given to landlords to end a lease with a tenant earlier than the agreed period.
This is usually when tenants have breached terms within the lease, allowing landlords to take back possession of the property.
As the pandemic placed extraordinary pressures on businesses to maintain regular cash flow and make rental payments, the previous protections were designed to allow businesses to remain in their properties and continue operating safe in the knowledge that they would not be evicted.
Imagine if businesses were able to exercise forfeiture during the pandemic for non-payment of rent – it would’ve led to an exodus of businesses that used any sort of rental property space to conduct its operations.
Due to the pressures exerted by the pandemic, the protections reshaped the relationship between landlord and tenant.
Both parties have experienced some form of financial difficulty over the last several years – tenants have had to dig deep to keep their businesses afloat, while landlords have lost income from their property investments.
Although the pause on forfeiture on non-payments provided a lifeline to businesses struggling to make rent, landlords will still be owed the amount that wasn’t received – the protections were a suspension, not a cancellation of rent obligations.
With the end of ban against the right to forfeiture on 26 March 2022, save for Wales where the ban doesn’t lift until 24 September 2022, landlords will now be able to collect payment from tenants.
However, the rent that was not paid during the protected period is now classed as “protected rent debt”.
What does this mean for landlords seeking those debts?
Landlords seeking repayment of protected rent now have to go through an arbitration process set out by The Commercial Rent Act 2022.
Protected rent is those rent arrears that are owed from tenants who were legally mandated to close for the period from 21 March 2020 until the end of the Covid restrictions,
This arbitration process is voluntary and requires consent from both sides in order to progress.
An independent advisor can create an agreement of payment instalments and a plan to meet these new obligations, or decide to relieve the tenant fully from repayment depending on the circumstances.
The arbitrator can also decide to eliminate any interest payable by the tenant under the terms of the lease in relation to the whole or part of the debt.
The Scheme is unprecedented in that arbitrators have jurisdiction to impose terms that can effectively override lease obligations.
A delicate balancing act will need to be exercised between the tenant’s viability without relief, versus whether such relief will push the landlord into insolvency.
Viability is undefined but arbitrators should have an open mindset to the different types of business models out there and this will be assisted by reviewing financial documents.
What about legal fees? A party cannot recover their legal fees associated with the arbitration process from the opposing party and no costs incurred can be passed through the service charges of the lease or recovered in any other way through the lease concerned.
The overall rationale behind arbitration is to encourage parties to have open negotiations regarding the repayment of any protected debt to avoid any costly legal battles at Court.
It also provides an opportunity to develop a healthy relationship with an existing tenant.
The arbitration period only lasts until September 2022, after which normal rent debt collection methods are allowed to be used to collect protected rent debt, albeit there is scope for it to be extended.
However, there is still a lot to unpack here with the new scheme, such as when it comes to matters like the appeal process, if the arbitrator’s decision is not accepted, or enforcement options if a decision is not complied with, much of which we will see come to light and develop as more cases get pushed through the conveyer belt of arbitration.
Additionally, the government has indicated it has plans to empower local authorities to enforce compulsory rent auctions of properties that have been vacant on UK high streets for more than 12 months.
This would be a strategy to driving regeneration, and would primarily be aimed at commercial landlords.
There has been push-back on this as many landlords feel this is simply not the solution.
A more effective alternative would be to tackle heavy business rates.
With so many businesses still struggling with the aftermath of the pandemic, it’s unlikely to be financially feasible for them to trade (or bid in the first instance) from town centre premises.
Commercial landlords may end up converting their units into residential properties as a safety net.
Even though restrictions and the worst of the pandemic have mostly subsided, a flurry of new challenges are pushing businesses once again to the brink.
The cost-of-living crisis, inflation, and the exponential rise in energy prices will inevitably damage business performance, making rent payments a challenge once again.
Going further, even though society is now restriction-free, many businesses will still be in recovery mode and will be making up losses from the last two years.
Landlords should make sure to take the right steps in the coming months to ensure that any rental debt they seek to collect through traditional collection methods is not considered protected.
By understanding the tumultuous business climate, arbitration is an opportunity for landlords to keep their properties occupied whilst developing a stronger and more sustainable relationship with their tenants.
With the scheme now being live, the next few months will reveal publications of the first arbitration awards and this in turn will tell us how landlords and tenants are getting on; the more referrals to the scheme being indicative of landlords and tenants not reaching an agreement, so we will have to wait and see.
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