Flats

Landlords and Tenants

Vince Green, Head of Recovery Solutions
22/12/2021
Flats
Where are we now?

In light of the COVID-19 pandemic from 21 March 2020, the government introduced a range of temporary legislation measures which have restricted a Landlord's ability to:

  • forfeit business leases
  • use commercial rent arrears recovery procedures
  • wind up the tenant company for non-payment of rent.

While from 1 October 2021, restrictions on other unsecured creditors have largely been lifted, in regards to landlords, the restrictions outlined above remain in place until 25 March 2022. Instead, the Commercial Rent (Coronavirus) Bill and an updated Code of Practice were released on 9 November 2021, which together guide landlords and tenants about pandemic rent debts, introduces a proposed arbitration scheme (to be put in place following enactment of the Bill on 25 March 2022) and continuing prevention on the enforcement of ‘protected debts’.

Protected debts are those incurred where a business was subject to 'closure requirements', or subject to a 'specific coronavirus restriction'. In England, closure requirements were in place until 18 July 2021, albeit there are different dates applicable to different sectors up until that date. The Bill will not protect a tenant for rent arising outside of the relevant period, and the arbitration process will only apply to protected debts/rent. The Code suggests that, in the meantime, every effort should be made for the landlord and tenant to reach their own settlement before reverting to the arbitration process. For a tenant, the code provides that a tenant should meet its obligations under the relevant period in full, where affordable, although the tenant should not have to take on more debt or restructure the business simply to pay the protected debt/rent.

The intention of the arbitration process is that it will impose a legally binding agreement upon the landlord and the tenant, resolving rent arrears disputes and helping the market to return to normal as quickly as possible. While the parties are free to continue to negotiate outside of the legal arbitration process once it comes into force, the window to apply for arbitration will be 6 months from the date legislation comes into force. The maximum time frame to repay any arbitration award will be 24 months. The Bill relates to a protected rent debt where rent is due under a tenancy that was adversely affected by the pandemic. A business tenancy is considered to have been adversely affected during the relevant period where the whole, or part of the premises was of a description, subject to a closure requirement. This is assessed on a business by business basis.

After assessing the viability of a tenant’s business, if the arbitrator determines that, at the time of assessment, the business is not viable and would not be viable even if the tenant were to be given relief from payment of any kind, the arbitrator must make an award dismissing the reference.

The arbitrator’s principles are that any award should be aimed at preserving or restoring and preserving the viability of the business of the tenant so far as that is consistent with preserving the landlord’s solvency.

The arbitration process will not apply to rent arrears accrued outside of the relevant period.

At the moment the legislation is in draft and there are no real details of how the arbitration process will work in practice, what evidential requirements will be imposed etc. As a result, it may not be sufficient for directors to simply rely on the forthcoming arbitration process, but instead, further pro-active steps should be considered and a plan of action drawn up including a variety of scenarios that will avoid a possible administration or liquidation.

Practical Steps

  • A company should endeavour to negotiate a settlement with its landlord for the protected rent arrears, making available a financial statement on a company’s financial position.
  • Should such negotiations fail, notwithstanding the arbitration process, a company will have no protection for accrued rent arising outside the relevant period (for England at latest 18 July 2021). In those circumstances, in the absence of reaching an overall settlement, the landlord will from 25 March 2022, be able to enforce where there are non-protected rent arrears (i.e. forfeit the lease/petition for a tenant’s winding up) which could make the arbitration process irrelevant. Therefore, a company must review its cash flow, to see whether the full amount of the rent for the post-pandemic period can be paid, and if not, whether an agreement can be reached with the landlord regarding current/future rent.
  • Directors should have consideration to wrongful trading (and a risk of personal liability). A Board should evidence its decision making. It is particularly important to note that directors are judged not only according to their own knowledge, skill and experience, but also by an objective test, namely what would be expected from a reasonable person carrying on the same functions as the director. It is also important that directors show that at the time of their decision making, their actions were reasonable, prudent and justifiable. A point to consider is whether directors are being fair and reasonable to continue to trade, if they are still accruing rent that cannot be repaid, or cannot be demonstrated as being repayable from future cash flow, hence the importance of preparing trading and cash flow forecasts.
  • If a Board considers that rent will continue to accrue, then it needs to consider whether it is fair and reasonable to assume that the Board is acting in the best interests of its creditors, and if it is not, then the Board should consider cessation of trade. This again seems to point to the importance of negotiation with the landlord not only for the protected rent but also the post-pandemic rent.
  • If a company’s business is viable going forward and it needs temporary protection from all its creditors then discussions with an Insolvency Practitioner should be considered. An Insolvency Practitioner will provide advice to the Board and may suggest processes such as administration or a Company Voluntary Arrangement (CVA) to preserve the business of a company. A CVA process is worthy of consideration as this would cover all liabilities, whether pandemic or post-pandemic. A CVA needs the support of 75% of voting creditors, and thus will require the approval of the landlord. If the landlord holds sufficient votes and rejects this process then the Board will need to reconsider administration or more likely, liquidation.
  • If a company’s business is not viable, then the Board should consider cessation of trade and the Creditors’ Voluntary Liquidation process.
people presenting at office desk

How Crowe can help

At Crowe, we have a team of experienced and licensed Insolvency Practitioners who can advise you on the best course of action, depending on your business’s circumstances. Please get in touch with either Vince Green or Steven Edwards who are licensed Insolvency Practitioners, or your usual Crowe contact.

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Contact us

Vince Green
Vince Green
Head of Recovery Solutions
Kent