Lawbite: Tick tock - The clock is ticking on the Coronavirus rent arbitration scheme – so what next?

• United Kingdom

• Real estate
• Real estate dispute resolution
• Real estate litigation - LawBite

23-08-2022

After 23 September 2022, no more referrals to arbitrators under the scheme (the Scheme) created by the Commercial Rent (Coronavirus) Act 2022 (the Act), will be possible. The Scheme was introduced to resolve disputes regarding certain unpaid covid related rent arrears (widely defined as Protected Rent Debt). With the clock ticking, landlords and tenants alike will already be considering their options for when the Scheme is no longer available. This note seeks to explore some of the options from a landlord’s point of view.

The Moratorium Period - restrictions on enforcement:

The Act establishes a moratorium period during which time landlords were restricted from taking certain enforcement action in relation to Protected Rent Debt (the Moratorium Period). The Moratorium Period is in place until the last date a referral can be made to an arbitrator (i.e. 23 September 2022) or the conclusion of an arbitration under the Scheme.

Given that a mandatory pre-arbitration stage will need to be followed before a referral can be made (which in most instances will take 28 days), in reality the deadline to initiate the Scheme is 26 August 2022. This means that action is required imminently if there is any intention of making a referral.

An important change is that outside of an already-commenced arbitration referral, all enforcement options will once again be open to landlords in relation to Protected Rent Debt from midnight on 23 September 2022. This is a key point for landlords who may have had their hands tied for over two years between the global restrictions in place up to the passing of the Act and then the restrictions introduced by the Act!

A landlord will need to decide whether it wishes to take action to recover the arrears and / or terminate the tenancy under any forfeiture provision. The priority may be the recovery of the premises for re-letting. Alternatively, seeking recovery of funds  while letting the lease continue may be the focus. It may be that both can be achieved, but it is important to know which of these is the priority as that will inform the best route forward. Some of the steps will be mutually exclusive. Remembering, of course, that where an arbitration is still ongoing after 23 September 2022 the restrictions on enforcement will remain in place until the arbitration is concluded.

Lifting of restrictions – the options

• Court proceedings:

After the Moratorium Period ends, pursuing the formerly Protected Rent Debt through the courts will again be an option. Landlords will be comforted to note that all attempts by tenants to date to defend such actions based on various covid-related arguments have been unsuccessful, most notably recently demonstrated by the conjoined appeals at the Court of Appeal - Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others and London Trocadero v Picturehouse Cinemas [2022] EWCA Civ 1021 (our article on the decision can be accessed here).

Some landlords may have delayed commencing court proceedings in relation to unprotected rent debt in order to commence one set of proceedings for all arrears once the restrictions introduced by the Scheme are lifted. 

Further a landlord may have already commenced proceedings for the recovery of unprotected rent debt. In this case, rather than commencing new proceedings in relation to the formerly Protected Rent Debt, it may be able to secure the court’s permission to amend the existing proceedings to increase the value of the claim to reflect the formerly Protected Rent Debt.  Remembering of course that this may also require an additional issuance fee to reflect the increase in value of the claim. It may be easier to commence separate proceedings and then ask the court to combine these in order that they can be managed and heard together.

It is important to remember that any enforcement action seeking to recover sums from a tenant will only ultimately result in a recovery being made if the tenant has the means to settle the debt, or sufficient assets to enforce against.

• Forfeiture considerations:

If forfeiture action is intended then the landlord will need to ensure that it does not waive the right to forfeit once the Moratorium Period ends.

Section 5(2) of Schedule 2 to the Act provided that no action by or on behalf of a landlord during the Moratorium Period, other than an express waiver in writing, amounts to waiver of the right to forfeit in relation to the rent arrears. However, anything done once the Moratorium Period has ended could act as a waiver. Particularly crucial to remember given that the September quarter rent will fall due shortly after the 23 September 2022! Landlords will therefore want to ensure that their teams and their agents are alert to the possibility of waiver if forfeiture is on the cards, meaning of course no rent demands or acceptance of rent on their part.

• CRAR considerations:

Using the Commercial Rent Arrears Recovery (CRAR) process for the recovery of arrears will also be available again subject to the usual restriction on using this remedy, e.g. there must be a minimum amount outstanding equivalent to 7 days’ rent.

There is another option available to landlords where subtenants are in place which is linked to CRAR. 

Section 81 of the Tribunal, Courts and Enforcement Act 2007 allows a superior landlord to serve a notice on the subtenant requiring the subtenant to pay its rent directly to the superior landlord rather than to its own landlord until the immediate tenant’s arrears have been satisfied. A superior landlord can only serve a valid s.81 notice on the subtenant where it is entitled to exercise CRAR against its immediate tenant. 

Care should be taken, however, as exercising CRAR will waive a landlord’s right to forfeit in relation to pre-existing breaches.

• Winding-up considerations:

During the Moratorium Period there have been no restrictions on serving statutory demands in relation to Protected Rent Debts, but the Act provides that no winding-up petition can be presented in relation to that demand if it includes Protected Rent Debt.  This will change once the Moratorium Period ends. 

A landlord may decide to serve a statutory demand a few weeks before the 23 September 2022 in relation to Protected Rent Debt (and any unprotected rent debt) on the basis that the 21 day period in which the debtor has to pay will expire after the 23 September 2022. That will leave it in a position to present a winding-up period without delay once the restrictions are lifted.

• Tenant deposit:

After the Moratorium Period ends, Landlords can again draw down for the formerly Protected Rent Debt against rent deposits where one is in place.

If the landlord has already drawn down on the deposit for Protected Rent Debt it will again be able to enforce any requirement on the part of the tenant to top up the rent deposit sum.

The terms of the tenancy deposit will need to be considered and followed in each case.

• Apportionment of rent:

During the Moratorium Period landlords have been required to appropriate sums received from tenants to first meet unprotected rent debt before applying it to Protected Rent Debt – unless of course the tenant has exercised its right to appropriate differently.  Once the Moratorium Period ends this restriction lifts and the position reverts to the position before the Act came into force.

• Guarantors and Former tenants:

The Act also offered guarantors and former tenants some protection from enforcement in relation to Protected Rent Debt.  Once the Moratorium Period comes to an end this protection will cease and the enforcement options against Guarantors and Former tenants will return to play. 

Some thoughts on tenant’s considerations

With the breathing space offered by the Scheme coming to an end tenants may be looking for re-gear opportunities or even looking to exit lease obligations in order to minimise further exposure to debt and liabilities. 

An obvious exit opportunity would be a break option but not all leases contain one. Landlords should therefore not be surprised to see tenants who wish to terminate their leases early seeking to negotiate an early surrender of the lease. This may be a good way of tying in any other liabilities (e.g. dilapidation related claims) ensuring a clean break for the tenant. If this suits the landlord’s objectives for the premises it may be a good option for all parties. In any case both parties will want to ensure that until a surrender is finalised all negotiations be conducted on a without prejudice and subject to contract basis.

If lease termination isn’t a tenant’s aim a tenant may (if it hasn’t already) wish to approach its landlord to seek to negotiate more favourable existing lease term, for example, a variation of payments terms – quarterly rent to monthly rent. Landlords may be open to a compromise although may wish for something in return (perhaps the removal of a  break option in the existing terms). Again, this comes down to a commercial negotiation between the parties who should again ensure that until an agreement is properly recorded any negotiations be conducted on a without prejudice and subject to contract basis.

Conclusion:

The Scheme has not been as popular as the government originally anticipated – a handful of referrals compared to the estimated 2,500 expected number of cases when the Act was passed. 

It is very likely that a number of disputes have been settled through negotiated settlement between the parties (agreements potentially incorporating both Protected Rent Debt and unprotected rent debt). With the limitations of the Act possibly providing some added motivation to the reaching of such settlements! 

It is undeniable, however, that a number of disputes remain unresolved and we are left to see whether the ticking clock motivates further resolution or whether the 24 September will see an upsurge of court claims and forfeiture actions.

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