How will the end of the forfeiture moratorium affect you?
Background
During the depths of the pandemic, the Government introduced a ban on forfeiture which prevented landlords from taking enforcement action against their tenants for non-payment of rent, and all other sums reserved as rent (so service charge, insurance contributions etc) due under their lease.
Following several extensions, the moratorium expired on 25/3/2022 (itself a rent payment day) meaning landlords are once again able to make use of the usual enforcement mechanisms where their tenants are in arrears. In the lead up to the end of the moratorium the big question landlords and tenants were asking was how the Government intended to deal with the c. £7 billion of rent arrears which had accrued during the pandemic.
What did they decide?
The Government went to great lengths to stress that its preferred route was for landlords and tenants to reach a negotiated settlement that worked for all parties. However, with neither party keen to break cover first it soon became clear that a mechanism would need to be prescribed. The Commercial Rents (Coronavirus) Act 2022 (“the Act”) received Royal Assent bringing with it a legally binding arbitration process to deal with rent arrears accrued during the pandemic where parties are unable to reach an agreement between themselves.
What does it provide?
The Act applies to all leases of business premises, meaning any alternative occupational arrangements (e.g. concession agreements, licences to occupy and management agreements) are all outside its scope. It prevents landlords from forfeiting leases or initiating commercial rent arrears recovery in respect of rent due for the period from 21 March 2020 to the later of 18 July 2021 or the date on which the closure requirements under the Coronavirus Act 2020 ceased to apply (“The Protected Period”).
If the parties are unable to agree on how to deal with the arrears due in respect of the Protected Period either of them can apply for arbitration under the Act up to and including 24 September 2022.
Where an application has been made to arbitration landlords are unable to exercise their right of re-entry until the application has been dispensed with. The arbitrator will make an award which seeks to protect “viable” businesses and the solvency of the landlord. There is no definition of “viable” business, just a set of guidelines for the arbitrator to take into account, meaning there is likely to be a disparity in how this is applied. Finally, the arbitrator’s award is binding on the parties bringing the matter to a close.
Practical points for landlords:
- Landlords are now able to take enforcement action to recover any arrears owed for the period from 19 July 2021.
- Given the binding nature of the arbitration, and the possibility that neither party will be wholly satisfied with the outcome, landlords should consider whether they want a third party to rule on the situation or if a negotiated solution would be preferable.
- There may be an influx of properties coming on the market in Q1 2023, following the expiry of the arbitration period, which could lead to a lengthy void period
- If you are keen to re-let the premises it may be better to move the tenant on to a flexible tenancy agreement giving you the ability to serve notice requiring the tenant to vacate if you are able to exchange an agreement for lease with a new tenant.
Practical points for tenants:
- As landlords are able to forfeit for any arrears due from 19 July 2021 you should ensure your rental payments are up to date from the end of the Protected Period.
Re-open negotiations with your landlord to avoid having a third party opine on whether your business is “viable”. - Be ready to make an application to arbitration by mid-September 2022 if you are unable to reach a negotiated settlement with your landlord.
- If you are considering assigning your lease in the near future any third party may want the position regarding arrears settled before they are willing to take over the lease. It may therefore be better to deal with the arrears now so as to ensure you are able to assign when you find a buyer.
If you would like to discuss how the end of the forfeiture moratorium affects you, then please contact Alex Hutchings at amhutchings@greenwoods.co.uk
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. Greenwoods Legal LLP is a Limited Liability Partnership, registered in England, registered number OC306912. Our registered office is Queens House, 55-56 Lincoln’s Inn Fields, London, WC2A 3LJ. A list of the members’ names is available for inspection at our offices in Peterborough, Cambridge and London. Authorised and regulated by the Solicitors Regulation Authority, SRA number 401162. Details of the Solicitors’ Codes of Conduct can be found at www.sra.org.uk. All instructions accepted by Greenwoods Legal LLP are subject to our current Terms of Business. VAT Reg No: 161 9287 89.