Covid Rent Arrears – will the Government's latest proposals work?

The announcement has been met with a mixed market reaction. For many landlords, it is seen as yet another blow following 15 months of uncertainty and heightened tenant restructuring activity focused on leasehold liabilities. An estimated £6bn of rent debts are reported to be in the system with landlords claiming that not all of those arrears are as a result of financial difficulties caused by the Covid-19 crisis.  Some well-capitalised retailers have reportedly declined to pay rent during the moratorium. Some commercial property owners (coordinated through the British Property Federation) are exploring legal action against the Government as a result of the extended moratorium.   

Complimenting this extension was an announcement of proposed new legislation which will seek to provide a framework in which landlords and tenants reach consensual agreement over Covid-19 related arrears. Unlike the existing, non-binding Code of Practice (published summer 2020), failure to reach agreement would lead to a mandatory arbitration procedure.  We do not yet have the detail on these proposals. On closer examination of the Government's announcement, the picture for landlords may not be as bleak as it first appeared.

The Government made a number of statements which will be welcome to the landlord community:

1. Tenants who can pay are now expected to start paying. This is to target those tenants that landlords claim have not been financially impacted by Covid-19 such that they cannot afford their rental liabilities. For example, retail tenants who were deemed "essential" and could remain open to trade, or those who were able to leverage their online presence and/or takeaway and delivery services.  By comparison, tenants such as nightclubs and other hospitality businesses, some of which are still not able to open for trade, will need more help to recover from the pandemic.
   
   
2. Landlords are expected to "share the pain", however this is unlikely to mean that a landlord has to extend concessions on rent arrears if the tenant is not financially impacted such that it cannot pay.
   
   
3. It is likely that neither the tenant nor the landlord will see the mandatory arbitration as an attractive option (although this is yet to be seen depending on the framework put in place). This is likely to motivate tenants as much as landlords to come to some arrangement.
   
   
4. The announcement was clear that it was aimed at "ring-fencing" arrears which accrued as a result of the Covid-19 epidemic. This is more limited in scope than the moratorium on forfeiture, which applies in respect of any rent arrears, whether or not pandemic related. The announcement suggests that those arrears are further limited by relating to periods of forced closure, rather than periods of time in which the tenant elected not to reopen.
   
   

Where consensual deals have been reached in the market to date, it has generally not been standard practice to waive all arrears since March 2020. Instead there has been a mixture of one or two quarters' rent being waived, with the remainder being deferred and subject to repayment plans.  We can expect this approach to continue but exactly how an arbitrator will balance the needs of landlords and tenants is unknown pending sight of the proposed legislation and associated guidance.

Tenants will have welcomed what appeared to be a further relief while they get back on their feet. However, they must remain mindful that (as the legislation currently stands):

1. From 1 October 2021, landlords will be able to use statutory demands and/or winding up petitions to pressurise tenants with the threat of insolvency in order to recover rent arrears. Furthermore, landlords will be able to exercise their rights under the Commercial Rent Arrears Recovery (CRAR) in respect of arrears from the start of the pandemic (provided that at least 554 days' rent are outstanding).
   
   
2. Landlords are still able to pursue tenants to recover rent arrears through the courts. The recent case of Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd [2021] EWHC 863 is testament to landlords' increasing appetite to take such steps.
   
   
3. Depending on how narrowly drawn the legislation is, tenants may still face a substantial rent arrears bill not subject to the arrangements outlined above.
   
   
4. Tenants in genuine financial difficulty as a result of the pandemic may find that the arrangements do not go far enough, or that the measures are not put in place quickly enough. In that case, directors of tenant companies will need to stay mindful of their obligations to consider creditors, changing the focus of any consensual deals that are put in place. Whilst the Government's proposals are likely to prompt more conversations between landlords and tenants, it is unlikely to remove the need for more formal restructuring processes such as the company voluntary arrangement (CVA) or more recent Restructuring Plan (pursuant to s.26A of the Companies Act 2006 – see an example of our recent experience with an RP) for those tenants who realise that the writing is on the wall.
   
   
5. Tenants are now starting to pay business rates again, at reduced rates but gradually increasing up to March 2022. This will add further financial pressure to tenants now also needing to address significant rental arrears.
   
   
6. Similarly, the furlough scheme is being gradually withdrawn, which will increase financial pressure on occupational tenants with employees.
   
   

The Government has once more left many questions open for the landlord and tenant communities. It is further not known what expectations will be placed on lenders to support the proposed consensual arrangements, nor the impact on guarantors of rent. Whilst many consensual arrangements have been put in place throughout the pandemic and the overall picture for preventing further lockdowns in the UK is looking more positive with the successful vaccine programme, there remains future uncertainty on how quickly business will bounce back with much deeper longer terms considerations relating to changed consumer habits. The prospect of a review of commercial landlord and tenant legislation later this year increases the sense of uncertainty in the real estate sector. The Government has no doubt sought to facilitate the transition out of the pandemic between landlords and tenants. This is a difficult balance to achieve with no one size that will fit all.