Commercial Evictions Moratorium Ends
In March 2020, the government locked down the UK. Tens of thousands of businesses were forced to close their doors. Trading stopped overnight, and with it, their income stream. But even though they weren’t making any money, they still had to worry about the costs they couldn’t avoid – like the rents they were paying to their commercial landlords.
With this in mind, the government introduced a general moratorium on commercial evictions and restrictions on Commercial Rent Arrears Recovery (CRAR) in England and Wales to ensure that struggling businesses didn’t have to worry about being evicted or pursued for rent arrears in a situation that was wholly outside their control.
Now, with the improvement in the economy and the threat of COVID-19 receding, the government is keen to take measures to help out commercial landlords who have seen their income diminish significantly over the last two years, but at the same time ensure that businesses aren’t left in a real predicament as they become liable for rents and arrears while they struggle to put their finances back together again.
The Commercial Rent (Coronavirus) Act 2022 came into force on 24th March 2022 and ends the general moratorium. It will provide a legally binding arbitration process to resolve pandemic-related outstanding commercial debts.
The aim of the Act is to protect business tenants in the retail, hospitality and leisure sectors, who are only just starting to recover financially and might not be in a position to immediately pay back the entirety of their commercial rent arrears. Without such protection, they might end up facing legal action to recover those arrears, leading to the closure of their businesses.
The rent arrears covered by the Act are those incurred by businesses, including pubs, gyms and restaurants which were required to close, either wholly or partly during the first lockdown. The Act only covers debts from the first lockdown (21st March 2020) until the restrictions for relevant businesses were lifted. Rent arrears unrelated to that period are not covered by the Act.
Both tenants and commercial landlords are being encouraged to negotiate agreements on outstanding debts using the Code of Practice that accompanies the Act (see below) but if they are unable to do so, the new binding arbitration system in the Act can be used as a last resort, provided that eligibility criteria are met. Any referral to Arbitration needs to be made within six months, i.e. by 25th September 2022.
The Code of Practice
In 2021, the government published an updated Code of Practice that gave commercial landlords and their tenants a clear outline of how to settle outstanding debts. It said that those tenants who could pay their rental arrears in full should do so, and those who were unable to do so should, in the first instance “negotiate with their landlord in the expectation that the landlord shares the burden where they are able to do so, and only as far as necessary, by waiving some or all rent arrears or giving time to pay.”
Whilst the Code of Practice applies across the UK, the Act only applies to England and Wales. In Scotland, a different approach to commercial evictions was taken.
Firms who satisfy the eligibility criteria will remain protected for six months following the date that the Act came into force, during which they can apply for arbitration. If the arbitration process is still ongoing at the end of that six-month period (25th September 2022), protection will continue.
Both sides are, of course, at liberty to continue negotiations outside the legal arbitration process. If they have already reached an agreement on payment of arrears, they won’t have to go to arbitration on the matter.
The landlord won’t be able to start enforcement action regarding the protected rent arrears (which accrued during lockdown) until the six-month protection period ends, or until the arbitration process is over, if it takes longer than that.
When the arbitrator is considering writing off or deferring payment of all or some of the arrears, they will look at the financial position of the landlord as well as the tenant.
When the arbitrator makes their decision, they may decide to award a reduction of protected rent debt or they may award time to pay, although the maximum period they can allow is 24 months.
Tenant and landlords each meet their own costs when arbitration takes place. It’s important to remember that those costs may be significant – depending on how much work has been done on the financial affairs of the tenant and possibly the landlord too. This is another reason why it is often preferable to both parties if an agreement can be reached without the need to refer to Arbitration.
What is CRAR?
Commercial Rent Arrears Recovery was introduced in 2014 by Part 3 of the Tribunals, Courts and Enforcement Act 2007. It’s a procedure which lets commercial landlords get back rent owed to them by taking control of the tenant’s goods and selling them without the need to issue court proceedings and obtain a court order. From April 2014, CRAR applied to all new and existing commercial leases.
When a landlord wants to use CRAR, they must give seven days’ notice of enforcement. After the end of this period, Certificated Enforcement Agents (rather than any other type of bailiff) can enter the property to seize goods. If a landlord does not follow the CRAR process, their action could be deemed void and the landlord could be subject to criminal proceedings.