A day of reckoning has been predicted by many observers of business landlord and tenant relationships. The pandemic has caused much pain on both sides. The continual postponing of the right of forfeiture and other limitations on landlords’ action have created a pressure bubble. That bubble has been heading towards an explosion of legal action when it bursts.
The toothless code of practice
The Government attempted to encourage cooperation through the Code of Practice for commercial property relationships during the COVID-19 pandemic, published in June 2020. It was well-intentioned, but signalled its lack of teeth in its introduction; emphasising that it had no legal effect. It urged reasonableness by both parties, but was really addressed at those who were bent on behaving unreasonably.
The only viable pressure valve is legislation
There are two phases to the Government’s latest approach. The first is the phasing out of restrictions, tempered by the imposition of a “coronavirus test” to control insolvency action. The second is the introduction of a mandatory arbitration procedure, with a planned introduction to coincide with the lifting of the restrictions on forfeiture and CRAR on 25 March 2022. It also contains a coronavirus test.
You can read about the changes to insolvency action in Emily Reeve’s article.
The mandatory arbitration procedure is contained in the Commercial Rent (Coronavirus) Bill, making its way through Parliament at the moment. You can read about its proposals in Lydia Robinson’s article.
The legislative intention revolves around tenants’ business viability. It requires tenants to consider their ability to pay all of their contractual liabilities, and not just those of their suppliers, for example. If there is a prospect of paying rent arrears, then a deal should be sought with the landlord. If there is no realistic prospect, then some sort of restructuring could be considered. See our earlier article about one of the possibilities: Corporate Insolvency and Governance Bill: Arrangements and reconstructions for companies in financial difficulty | Michelmores
The Government’s aim is to give tenants the softest landing possible by requiring a landlord to prove that its tenant’s inability to pay is not due to the effects of coronavirus on the tenant’s business. Early court decisions have shown that this is a difficult test to overcome.
For those landlords faced with stubborn tenants there is still a window open, but it is closing fast. It is still possible for a landlord to sue for arrears of rent, including those debts which would be caught by compulsory arbitration after 25 March 2022. Recent court decisions have shown that there is no “coronavirus defence” to a contractual debt.
Whether court action is likely to have the desired effect is a matter of judgment. It could be the pressure required to force movement by a tenant. On the other hand, a landlord will need to think carefully about what it can feasibly achieve with a court judgment. Little has changed since my article last year about this: COVID-19 – latest pandemic tips for business landlords | Michelmores
It is clear that enforcement options are limited, but they will become more limited soon.