Government introduces new legislation to tackle commercial rent arrears disputes

In October, we covered the recent case of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd which concerned a dispute about commercial rent arrears incurred during periods of national lockdown. A link to that article can be found here.

The UK government has now published its new rent arrears code and draft legislation to help commercial landlords and tenants resolve disputes regarding unpaid rent which came about during lockdowns.

The code, along with the new Commercial Rent (Coronavirus) Bill, specifies the types of rents and the time periods which will be subject to a new binding arbitration process. This forms the latest round of measures the government has introduced for commercial leases in response to the pandemic. If a landlord and tenant fail to reach an agreement concerning the repayment of commercial rent arrears, either party will be able to request arbitration to resolve the matter instead of taking the matter to court.

The government has estimated that the majority of landlords and tenants have already reached an agreement to settle rent arrears incurred during periods of national lockdown. Consequently, existing agreements should be honoured and the code and bill will not seek to modify or override them. They will, however, apply to disputes which have not been resolved by an existing agreement.

The key points of the bill are as follows:

• The measures apply to commercial leases. Residential leases will not be affected.
• The definition of ‘rent’ for the purposes of the bill includes service charges and interest on rent and those service charges.
• The bill uses the term ‘protected rent debt’ – rent due if a tenant’s business has been adversely affected by coronavirus (i.e required to close) during the ‘protected period’. The protected period is 21 March 2020 -18 July 2021 for commercial leases in England or 21 March 2020 – 7 August 2021 for commercial leases in Wales.
• The bill will introduce a temporary moratorium on debt enforcement remedies available to commercial landlords if the definition of protected rent debt applies. This will limit landlords’ abilities to pursue claims for debt recovery, re-entry or forfeiture. This will continue until either a settlement is reached, a request for arbitration is made, or the six-month time limit for making an application for arbitration has passed.
• Either the landlord or the tenant may apply for arbitration. They will need to go through a preliminary correspondence phase and then serve a notice of intent to apply to an arbitrator, demonstrating the relevant principles and behaviours set out in the code.
• If appointed, an arbitrator will have the ability to reassess the amount of rent payable and grant the tenant up to 24 months’ additional time to settle rent arrears if necessary. The conduct of the parties will be considered by the arbitrator in reaching a decision.

It must be noted that not all landlords and tenants will be eligible to apply for arbitration. The bill and code will only apply to businesses in England and Wales that have closed or ceased operations in whole or in part because of regulations introduced during the pandemic. Businesses that remained fully open will not be affected. This means that so-called “non-essential businesses” are more likely to benefit from the provisions of the bill than, for example, supermarkets.

The introduction of arbitration, combined with a code of practice governing how landlords and tenants should resolve their rent disputes, is a major development for commercial leases in England and Wales. While many landlords and tenants have already reached an agreement concerning commercial rent arrears, the proposed legislation will help to encourage landlords and tenants to work towards a compromise before seeking potentially costly legal remedies for rent arrears.