Commercial rent arrears: paid or delayed?

The post below was first published on our Real Estate Development blog

Landlords of commercial premises have, quite understandably, been awaiting further details of the UK Government's anticipated "binding arbitration" scheme for rent arrears which have accrued during the Covid-19 pandemic and associated lockdowns. Happily for landlords and developers, a recent decision in the High Court has suggested that the courts will not entertain tactics by tenants trying to delay payment of arrears pending the introduction of this proposed arbitration scheme. The Court has also rejected new arguments by a tenant that it is entitled to a defence (or counterclaim) against a landlord for the period when it could not use its premises profitably.

Proposed scheme

The binding arbitration scheme, which was briefly outlined by the government when it was first announced in June 2021 (see our earlier post), remains shrouded in mystery. In August 2021, the government published a policy paper reiterating that it will only ring-fence rent payments in respect of the periods when commercial tenants were affected by Covid-19-imposed closures, and the use of an arbitrator will only be as a "last resort" when the parties are unable to reach an agreement on such payments. The stated aim was repeated: for landlords to "share the financial burden with tenants".

This has created uncertainty for landlords and developers, and has made it difficult to determine likely returns on property investments, as the government has given no indication of how the scheme will apportion liability. Will there be a fixed percentage of ring-fenced arrears which landlords are unable to recover? Will the amount written off depend on the conduct of the parties to date? Or will each arbitrator have the discretion to award tenants the discount they see fit, depending on individual circumstances? Unfortunately, these all remain unanswered questions. However, it is hard to see that a landlord can necessarily expect to recover 100% of its arrears given the government's indications that some kind of compromise is appropriate regardless of where liability would fall under the strict terms of the lease.

Current impact

An inevitable consequence of the scheme's announcement has been a drive from commercial landlords to obtain payment of arrears through court proceedings before the scheme comes into force (if indeed it does, at an unknown future date). Court remains a forum in which there is the potential to recover, or at least obtain a Court Judgment for, the entire amount owed under the lease.

On the other hand, some tenants have been seeking to rely on the prospect of the upcoming scheme to avoid payment now of what might soon become ring-fenced debts susceptible to enforced compromise. One such instance reached the High Court in July: London Trocadero (2015) LLP v Picturehouse Cinemas Limited & Ors [2021] EWHC 2394 (Ch). This was an application for summary judgment by London Trocadero, the landlord, on an arrears claim against one of its tenants, Picturehouse Cinemas. Summary judgments are commonplace in simple debt claims, and the courts have continued to award them in the context of rent arrears despite Covid-19 (see, for example, Cine-UK [2021], EWHC 1013 (QB) and Commerzreal, [2021] EWHC 863 (Ch)). In this case, however, the tenants applied to have the summary judgment hearing adjourned, one of their arguments being that they would otherwise be prevented from participation in the anticipated arbitration scheme, which also may soon oust or at least qualify the courts' jurisdiction to deal with Covid-19 arrears cases.

Deputy Judge Vos firmly rejected this argument on the basis that the new scheme is expressed to apply to "money owed". In contrast, Picturehouse Cinemas was disputing the very fact that money was owed to London Trocadero, with arguments based upon its inability to use its premises due to the various lockdowns. So, the question for the Court to decide was whether money was or was not owed, where Picturehouse Cinemas asserted that the rent should effectively be suspended during these periods. Therefore, the scheme was not relevant to the dispute.

This decision now stands as authority (subject to any appeal) that tenants cannot seek to avoid payment of debts that they are already disputing in court proceedings by relying on the proposed arbitration scheme. It also suggests that the scheme, as currently imagined, will only step in to assist tenants who accept liability to pay arrears; it seems to us that tenants will not be able to run concurrent arguments that Covid-19 arrears are both (i) not due, and (ii) eligible for a reduction at the landlord's expense under the scheme. Depending on exactly what the new legislation imposes as its test for recoverability or discount, we may then expect tenants to abandon arguments that sums are not due, and instead go straight to the arbitration – or if permitted, attempt each method in turn.

At least for now, this may also be good news for landlord owners and developers attempting to assess the risk of rent shortfalls for their investments in commercial real estate, as it means that proceedings for recovery of Covid-19 arrears should not be affected by the arbitration scheme, unless and until it comes into effect.

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