With estimates showing pandemic-induced rent arrears to be somewhere between £5bn and £7bn, it is clear that a significant problem is growing in the world of commercial real estate. After the pressures of the pandemic, it is no surprise that tensions may be running high.
But with new legislation on the way, which will attempt to provide options for both landlords and tenants to resolve rent disputes, what do the next few months hold?
During the course of the pandemic, the government has recognised just how important the payment/non-payment of commercial rents is and a number of measures were created to help landlords and tenants find solutions.
In addition to the moratorium on evictions that is in place until March 2022, and the ban on beginning winding-up petitions against commercial tenants for rent arrears, the government introduced a voluntary Code of Practice in June 2020, which promoted a collaborative approach between parties to the payment of rent. Landlords and tenants were encouraged to agree measures such as rent reductions and payment holidays to benefit both parties.
While many agreements have been reached, the code lacks teeth, meaning the problem has escalated and arrears have built up.
However, a new act is due to be introduced to Parliament later this year, which will aim to add greater structure. Taking inspiration from Australia, the new act will establish a binding arbitration system. This will be engaged when landlords and tenants cannot agree terms around the payment of rent arrears from specific periods when the tenant has been impacted by Covid closure restrictions.
That said, a distinct lack of detail has been revealed in advance. Aside from the initial press release in June and a policy statement released in early August, many unanswered questions remain. How will the arbitration system work? When will it be introduced? How long will it take?
While the government is set to issue an updated Code of Practice containing ‘principles’ for how arbitrations should be determined, this may not be sufficient to ensure consistent and fair decisions. One of the issues is the absence of any precedents or case law as to how such arbitrations should be determined in practice. For example, what if a tenant company was already in terminal financial distress before the enforced closures, making it difficult to disentangle the effect of Covid on its ability to pay rent? How will decisions be made between businesses affected differently by the local tier system? Should the landlord’s financial position be taken into account, or just the tenant’s?
As it currently stands, landlords and tenants should refer to the existing Code of Practice and work together to agree a way forward to settle rent arrears. Failing that, there is still an opportunity for landlords to pursue a debt claim ahead of the expected arbitration system in 2022. However, caution must be taken. Litigation can be a painful process and court action can damage landlord and tenant relationships.
The expected new legislation is undoubtedly positive, but, as with many new laws, a lack of upfront detail and risk of unintended consequences mean it is too early to tell whether arbitration is the answer. What is clear is that something needs to be done – and soon – before unpaid rent climbs even higher and jeopardises economic recovery.
James Fownes is property disputes partner at law firm Shakespeare Martineau