Business Secretary Kwasi Kwarteng has announced new laws and a Code of Practice are being introduced to resolve the remaining commercial rent debts accrued because of the pandemic and that are currently in the region of £6 billion.

The Commercial Rent (Coronavirus) Bill allows for the ringfencing of rent debt built up by businesses who have been forced to close during the pandemic. It establishes a binding arbitration system which will then decide what happens to that ringfenced debt and the existing moratorium measures will continue until the Bill has become law.

This updated commercial rents code of practice aligns with this legislation 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 government are still encouraging landlords and tenants to negotiate their own agreement where possible instead of resorting to the arbitration process and it has long been our view that landlords need to be taking a proactive stance with their tenants now. We believe that engagement with tenants has the potential to provide a better outcome for both parties and is something that we are currently actively involved in with landlords to achieve a solution in the short term, rather than having to wait until March 2022.

There are a number of significant points from a landlord perspective:

• The code states, that where it is affordable, a tenant should aim to meet their obligations under their lease in full.
• It makes clear that the preservation of the tenant business’ viability should not come at the expense of the landlord’s solvency.
• It explicitly states that tenants should never have to take on more debt – or restructure their business – in order to pay their rent.
• Landlords will be prevented from drawing down on tenancy deposits to cover outstanding ringfenced rental arrears. In the case that a landlord has already drawn down on the deposit and used it to cover ringfenced debt, the requirement for the tenant to top-up the deposit will be suspended.
• On the apportionment of rent, tenants are expected to specify which period of rent is being paid for. If an unspecified amount is, or has been, paid by the tenant following the end of the ring-fenced period, the landlord must use it to cover rent outside the ringfenced period.
• The government is protecting commercial tenants from debt claims, including County Court Judgements , High Court Judgements and bankruptcy petitions, issued against them in relation to rent arrears accrued during the pandemic and are encouraging landlords to attempt to reach a negotiated agreement with tenants rather than pursue a CCJ.

Although we welcome a solution, this code of practice is very much tenant focussed and does not assist landlords in respect of their short term cash needs to service their debts and provide returns to their investors. It will be interesting to see how the market reacts to property valuations as a result of this solution.

Assuming a successful passage through Parliament, the new laws introduced in the Commercial Rent (Coronavirus) Bill, will establish a legally-binding arbitration process for commercial landlords and tenants who have not already reached an agreement, following the principles in the Code of Practice.

This legislation will apply to England and Wales, with a delegated power for Northern Ireland. Scotland has adopted an alternative approach to commercial evictions since the start of the pandemic, due to different property legislation and market conditions and the existence of Landlord’s hypothec which provides landlords with the right to sell moveable goods that belong to the tenant to cover rent arrears. For more information please contact Mark Phillips or, if Scottish based, please contact Alistair Dickson.