Covid-19 arrears from July onwards: What will be the commercial property market's exit strategy?

The property industry will by now be very familiar with the unprecedented raft of protective measures introduced by the Government in response to the Covid-19 pandemic, which suspended (and continue to suspend) a landlord's ability to pursue remedies for the recovery of arrears (but also other covenant breaches). The practical effect of these measures is that landlords have generally not been permitted to seek to take back premises from tenants based on forfeiture for non-payment of rent. Additional restrictions on the use of the statutory Commercial Rent Arrears Recovery scheme (CRAR) and restrictions on the use of statutory demands to prevent creditors (including landlords) from presenting winding-up petitions gave further protections to tenants against enforcement action.

Those extensive tenant protections, having been extended several times, were always intended to be temporary in nature, and are now set to expire on 30 June 2021. With that date looming, and as the country gradually eases out of lockdown, the Government, through the Ministry of Housing, Communities and Local Government, has issued a Call for Evidence in the form of a Consultation, to support its decision making on the best way to withdraw or replace these protections afforded to tenants, whilst preserving tenant businesses and the jobs they support. The Government's objective is to understand better how commercial landlords, tenants, lenders, investors and any other stakeholders, are responding to the build-up of over a year's (and sometimes more) arrears that has occurred as a result of the impact of the pandemic on trade. The underlying question is about the risk to economic recovery posed by the existence of those debts.

Government also wants to know how landlords and tenants have negotiated an interim position on the payment of rent and compliance with other lease covenants. This arises because there has been in place since June 2020 a Code of Practice for the commercial property sector, revised earlier this month to include a template form for use by landlords and tenants using a consistent standard and quality of financial and trading information, to encourage resolution of the issues they face. The Code of Practice was originally prepared by a steering group of neutral, landlord and tenant representative bodies, and is endorsed by the British Property Federation, British Retail Consortium and the Royal Institution of Chartered Surveyors, amongst others. It encourages landlords and tenants to work collaboratively in navigating a way through the impact of Covid-19 on their respective businesses, and aims to facilitate discussions between landlords and tenants by communicating best practice and presenting a unified approach. Whilst voluntary, we have seen tenants relying upon the Code when responding to pre-action correspondence from landlords, and both landlords and tenants may choose to refer to the Code in proceedings eg when a court is asked by a party to award costs against another party, on questions of reasonableness of approach and so forth.  As such it is an extra layer for landlords and tenants to consider that may influence their strategy when dealing with enforcement of obligations.

The Consultation takes the form of an online questionnaire. At this stage, the focus is only on commercial property evictions and CRAR. It is not intended to cover concerns landlords may have about tenant businesses using CVAs to alter lease terms and to discard ongoing liability under leases that are surplus to their requirements. This is being separately monitored. Neither is it concerned with the parallel impact of the restrictions on statutory demands and winding up petitions, which apply to all debtors, and not just landlords, though the Consultation is interested in "the length of time for which these measures should be in place and how they relate to the other measures".  In order to inform government policy, the Consultation seeks views and the impact on businesses of six possible options, some potentially far-reaching:

1. allow all of the temporary protections afforded to tenants to expire on 30 June 2021, as envisaged;
2. allow the moratorium on the use of forfeiture to expire on 30 June 2021, but retain the protections against insolvency and the restrictions on the use of CRAR beyond that date;
3. delay lifting those protections for businesses most affected by Covid-19 (eg restaurants forced to close the eat in part of their businesses), but restore landlords' powers to pursue recovery of arrears in sectors which have been less affected by the pandemic (eg industrial) in a time limited way;
4. encourage increased formal mediation between landlords and tenants so that settlements can be reached amicably;
5. introduce a non-binding adjudication scheme, where, after hearing evidence from both parties, adjudicators can rule on how much of the current arrears of rent and service charge should be paid (adjudicator's remit could include waiving a proportion of each, giving additional time to pay these sums, whether reduced or not) and the ongoing lease terms (adjudicator's remit could include resetting the future rent, reducing/extending the lease term, defer/waive obligations to top up deposits), where disputes could be taken to court if the parties agree with the adjudicator's decision; and
6. introduce binding non-judicial adjudication, where a rent agreement has not already been reached, which would require legislation.

Some of these proposals are enormously far-reaching, and will raise concerns in the investment property industry, particularly among landlords who in the last year have shown their willingness to support tenants with rent waivers, reductions, deferments, monthly rent concessions and suspension of interest provisions, and tenants who have made substantial efforts to comply with their lease covenants.

Those who wish to complete the Consultation questionnaire can find it here. Anyone who doesn't wish to complete the Government's questionnaire direct can instead give their views to the British Property Federation, as a representative body for the real estate sector, by filling in their survey here.

The Consultation closes on 4 May 2021.

For more information please contact: