Commercial Rent Arrears, what next?

The restrictions which prevented commercial landlords from recovering rent arrears which were accrued during the pandemic have now ended (25 March 2022), so what happens next?

Rent arrears which were accrued and were payable by businesses that were subject to forced closure are ring-fenced for the period 21 March 2020 – 18 July 2021, or for a shorter period if the business was not closed for this full length of time.

This means the ring-fenced arrears cannot be recovered by using commercial recovery of arrear rent , the issue of winding up proceedings and a landlord cannot also use this as a reason to forfeit a lease. Instead, the landlord and tenant will have to take part in a binding arbitration process to resolve the arrears.

During the arbitration both the landlord and tenant will be able to present their case and also make an offer to settle the arrears.  The jurisdiction of the arbitrator will be to decide if the tenant should be given relief from all or part of the payment or make an order for the payment to be collected in instalments.

The window to initiate the arbitration process is now open and either the landlord or the tenant can initiate it up to 24 September 2022.

Other proceedings which landlords may have initiated outside of this arbitration process are suspended until the same date and after that, landlords can continue with their preferred enforcement process in respect of the ring-fenced arrears.

As there is no obligation on either party to refer the matter to arbitration it is likely many landlords will choose to wait until after the 24 September deadline when the moratorium is finally lifted.

Tenants need to consider whether it is in their better interest to refer the matter especially if they believe they have a strong case to present and genuinely have no way of paying the arrears back in full in the future.

Rent arrears outside of the ring fenced period can be recovered by the landlord enforcing their rights however they risk waiving the right to forfeit the tenant’s lease if they treat the lease as continuing.  This includes the continuation to demand rent or take the steps which are consistent with the lease remaining in place, such as serving notices.

Where a landlord receives a payment from the tenant of the rent in arrears this must be allocated to the payment of the no-protected rent.

Landlords also have a difficult decision to make, especially as they will effectively have to make a judgement call on the financial viability of the tenant in the longer term and whether they are likely to be able to recover the rent after 24 September.  Otherwise, they may be left with an empty property and the future liability for business rates.

There is clearly much to think about and if you would like advice on your commercial lease, get in touch with Marianne Webb, m.webb@gullands.com