UK commercial landlords and tenants: Government says your views will shape the road out of Covid-19

Government’s call for evidence

It is apparent that the government is concerned that removing the restrictions altogether could lead to a raft of forfeitures and statutory demands.  This, in turn, is likely to give rise to a (further) surge in tenant insolvencies, administrations and CVAs, given many commercial tenants have been unable to make up in recent months the losses they have incurred throughout the last year.  With this in mind, the government is currently seeking views from commercial landlords and tenants on options for lifting the measures from June 2021 onwards.

The government recognises that the measures cannot continue indefinitely and is therefore calling for evidence from businesses and commercial landlords. In particular, the government is keen to gauge how parties have responded to the pandemic and specifically, whether the majority have managed to mutually agree a way forward (i.e. by agreeing a rent deferral/concession). 

Options

The government is seeking views on the following options (though, of course, what is ultimately decided upon may include a combination of the below or something entirely different):

Option 1 – allow the measures to expire on 30 June 2021

This would return landlords’ ability to pursue accumulated rent arrears by means of statutory demands, winding up petitions, CRAR and eviction either through peaceable re-entry or via the courts. This is clearly the most straightforward option and will no doubt be favoured by landlords as restoring the status quo. However, it does not address the government’s concerns over the continuing impact of the pandemic on tenants.

Option 2 – Allow the moratorium on commercial lease forfeiture to lapse on 30 June 2021 but retain the insolvency measures and additional rent arrears amendments to CRAR for a period of time

Landlords would be able to evict tenants for non-payment of rent under the terms of their lease but would not be able to exercise CRAR, serve winding-up petitions or statutory demands.  Notably, where landlords have a non-paying tenant across the landlord's portfolio, the landlord would have to consider each lease individually in respect of its grounds for forfeiture and would not, for example, be able to take a blanket approach to the arrears by  forcing the entire business into insolvency. The government may take some comfort from the fact that landlords will not wish to take on liability for empty rates and so forfeiture is unlikely to be an attractive option unless an incoming tenant is lined up.

Option 3 - Target existing measures to businesses based on the impact that COVID restrictions have had on their businesses for a limited period of time

The government proposes leaving the measures in place for a further period for those tenants that really cannot pay (as opposed to those that simply will not pay) and who have been most affected by the Covid-19 restrictions until “they are back on their feet”.  The government suggests that this would be to protect those businesses which have “suffered the most severe consequences of the pandemic and continue to struggle with the after-effects of lockdown and continuing restrictions on trade”.  Although what constitutes a “severely suffering” tenant is up for discussion,  the government appears to be suggesting a semi-sectorial approach, i.e. looking at those which have had closure forced upon them (such as restaurants and pubs) against those which have not (such as offices and industrial sectors).

Option 4 – Encourage increased formal mediation between landlords and tenants

It is not clear what the government means by “encourage” and whether it plans to require the parties to have mediated as a pre-condition to issuing proceedings for arrears, for example.  Given the code of practice has had limited success in practice in encouraging landlords and tenants to work together it is, perhaps, difficult to see what more an enforced mediation can bring to the discussions.

Option 5 – Non-binding adjudication between landlords and tenants

The government moots the idea that non-binding adjudication could be required as a pre-condition of parties in particular sectors or groups of businesses taking their dispute to court.   Landlords may feel this is another hurdle to clear, before they are able to get closer to payment of their legal entitlement to the arrears, particularly from tenants that have taken advantage of the current measures.  That said, the parties would not be bound the adjudicator’s decision of what it considers a reasonable settlement and landlords would not, strictly speaking, be prevented from continuing with their preferred course of action. As such, there must be a risk that this will simply add additional process and cost for both parties.  

Option 6 – Binding non-judicial adjudication between landlords and tenants

The government proposes that parties will be required to submit to a binding adjudication in respect of debts that have accrued under leases where a rent agreement has not already been reached.  The government proposes that adjudicators will have the power to bind the parties to rent reductions or deferrals over a set period based on evidence proposed by both parties.

Landlords may feel frustrated by seemingly being required to “propose” reasons why a tenant ought to pay the full contractual rent (which a landlord is legally entitled to receive under the lease) not least because landlords may not have full disclosure of the tenant’s financial position so as to put the best case forward. More fundamentally, the idea that adjudicators should have the ability to effectively re-write lease obligations is unlikely to be palatable to landlords. 

Landlords will recall that the government also announced it will be looking to rebalance the relationship between landlords and tenants by undergoing a review of the “outdated” commercial landlord and tenant legislation, including the Landlord and Tenant Act 1954, rent structures and the impact of COVID-19. Whilst the government confirms the responses to the call for evidence will not form part of that review, the government has confirmed that responses will form “part of a longer-term strategic policy development exercise in assessing the current condition of the commercial property industry”. 

Next steps

Both landlords and tenants will therefore be keeping their eyes peeled for what the Government has in store and what the commercial property landscape will look like post-June 2021.

The call for evidence is open until 23:59 on 4 May 2021 and can be accessed here.

Authored by Rachel Lindberg