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Code of Practice for commercial property relationships following covid-19

As the moratorium comes to an end, and the Commercial Rent (Coronavirus) Bill is due to come into force, what is the updated code of practice for commercial property relationships?

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In response to the covid-19 pandemic, the Government introduced a number of measures to protect commercial tenants. The measures include a moratorium preventing commercial landlords from (i) forfeiting leases for non-payment of rent; (ii) utilising Commercial Rent Arrears Recovery (being the right to seize goods owned by tenants in lieu of rent); and (iii) presenting winding-up petitions following non-payment of rent. Whilst issuing debt proceedings has remained an option, many landlords have been able to reach agreements with their tenants (including monthly repayments, reduced rent and / or rent breaks) without referring to the courts. To facilitate these agreements, the Government introduced a voluntary Code of Practice which encouraged both landlords and tenants to work together on resolving unpaid rent.

The moratorium, which has been extended several times, is scheduled to end on 25 March 2022. Following the Government’s industry wide ‘call for evidence’ on withdrawing the moratorium, it has announced the Commercial Rent (Coronavirus) Bill. This will introduce a ring-fencing of rent debt built up by organisations that were forced to close during the pandemic and establishes a binding arbitration system to decide what happens to that ringfenced debt. The Code of Practice has been updated to align with the principles of the Bill, and “sets out what this arbitration process will look like, the kind of evidence that will be considered, and the key principles of fairness, affordability, and viability that it will adhere to.”

The Code of Practice reiterates the Government’s intention that, where possible, rent that accrued as a result of the pandemic should not force an otherwise viable business to cease operating. Its stated aim is to protect as many businesses, and jobs, as possible. The Code of Practice seeks to achieve this by:

a. explaining the scope and contents of the upcoming Bill including its creation of a binding arbitration process
b. providing best practice for landlords and tenants who are not in scope of the arbitration process
c. promoting good practice within landlord and tenant relationships, particularly regarding the negotiation process
d. providing the principles that should guide the landlord and tenant in consideration or negotiation of the debts referred to above

Once the Bill becomes law, it will introduce a binding arbitration system to determine any unresolved rent arrears disputes in respect of unpaid rent arrears relating to the ring-fenced period, of business tenants which:

a. were mandated to close their premises or cease trading (in whole or in part, including with exceptions such as non-essential shops being allowed to open for collections) under regulations made under the Public Health (Control of Disease) Act 1984 during the COVID 19 pandemic; and

b. lease their premises under a business tenancy, as defined by Part II of the Landlord and Tenant Act 1954, that is a tenancy under which premises are occupied by the tenant for business purposes (or business and other purposes).

The ring-fenced period is from 21 March 2020 to the last date restrictions (not guidance, and other than generally applicable rules such as displaying information about wearing face masks) were removed from the business tenant’s sector. Details of the ring-fenced periods are set out in the Code of Practice.

The Bill shall continue to prevent landlords from utilising forfeiture, CRAR and insolvency (against tenants that fall within the categories listed in (a) and (b) above) from the date the Bill is introduced until either (1) the parties reach a settlement; or (2) the timeframe to apply for arbitration has passed.

The Bill also introduces additional restrictions on landlords. Specifically, landlords shall be prevented from issuing debt proceedings whilst arbitration is still available or ongoing. They shall also be prevented from drawing down on any rent deposits to cover the ringfenced debt.

The binding arbitration for those tenants caught within the scope of the Bill will take the following steps:

(i) a compulsory pre-application stage which includes giving notice of the intention to apply for arbitration and an opportunity for the other party to respond;
(ii) an application by either landlord or tenant, together with a fee, to commence arbitration. This will include the compulsory pre-application documents, a proposal for resolution and any supporting evidence;
(iii) the other party shall then have 14 days to respond;
(iv) The parties will then choose between a public hearing or, if neither party asks for a hearing, the arbitrator will consider the matter based on the documentation provided;
(v) The arbitrator will seek to conduct the hearing within 14 days of a request for hearing. The hearing should last no more than 6 hours;
(vi) The arbitrator will consider their decision based on the written evidence and presentations made at the hearing;
(vii) The arbitrators award will be legally binding.

It should be noted that the Bill, once made law, will apply to England and Wales only, with Northern Ireland able to make similar legislation. It will not apply to Scotland.
At first glance, the Bill looks like more bad news for landlords, with restrictions continuing and further restrictions to be introduced.

However, landlords can take some encouragement that the new Bill includes provision that if a viable tenant is seeking to deviate from the terms of the lease they will need to demonstrate why the payment is unaffordable. That may include information about their assets and liabilities, impact of Covid 19 on their business and other information about their financial position and expenditure.

The Government in these reforms is looking to focus support towards tenants where it is most needed and where its absence might be catastrophic. To that end, these reforms are likely to be welcomed by those tenants.

Useful links

The outcome to the Government’s Call for Evidence can be found here: Commercial rents and COVID-19: call for evidence

The updated Code can be found here: Code of practice for commercial property relationships following the COVID-19 pandemic – GOV.UK (www.gov.uk)

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