Court Proceedings on hold for Covid Rent Arrears?

The Government announced on 9th November 2021 the details of its new legislation that is being proposed in relation to COVID rent arrears.   It is very likely to be passed in substantially this form, but it has not been yet. 
The new Code of Practice however does immediately come into force and replaces the former Code of Practice published 19 June 2020 and in force during the pandemic, with the Commercial Rents Code of Practice, November 2021

The government’s intention is that, where possible, rent debt accrued as a result of the COVID-19 pandemic should not force an otherwise viable business to cease operating. Contractual commitments should be recognised as far as possible while achieving a proportionate balance between the interests of landlords and tenants. 

So what does this mean? 
It appears to mean that whilst the aim is to ensure that viable businesses survive, this is not to be at the detriment of a landlord's solvency. 

The proposed legislation will also ring fence certain “protected rent debts”

The proposed legislation require parties to work together to agree terms for payment or, if resolution is not possible, to refer the matter to binding arbitration.  

However the proposed legislation does make clear that if a Tenant can pay the arrears then they should. 

Protected Rent Debts

A protected rent debt is a rent debt incurred due to the mandated closure of a business or premises (section 4). Rent includes sums due by way of service charge and interest (section 2(1). 

In England, the protected period commenced on 21 March 2020 and ends (at its latest) on 18 July 2021 (section 5). 

Businesses which were able to continue trading throughout the pandemic (such as supermarkets or pharmacies) are not within the scope of the legislation but businesses that had limits placed on its trading operations such as cafes and restaurants with limited opening hours and table numbers do.

Any debts which fall outside this definition remain payable in full, although it is important to note that that the current restrictions on forfeiture and Commercial Rent Arrears Recovery (“CRAR”) still remain in place until 25 March 2022, as do the restrictions on statutory demands and winding up petitions in relation to arrears incurred under business tenancies unpaid due to the pandemic.

Establish if arrears are protected rent debts.

If the landlord can show that arrears are not “protected rent debts” then court proceedings can be issued for the debt.

If the tenant can show that its arrears are “protected rent debts”, the next stage is to consider whether the tenant should be given relief and, if so, what relief. 

This can be negotiated and settled between the parties, or referred to binding arbitration either to:

a. Write off the whole or any part of the debt;
b. Give time to pay the whole or any part of the debt, including by allowing payment in instalments; and/or
c. Reducing (including to zero) any interest due. NB Interest during the period is in principle recoverable. 

What does this mean for proceedings issued from 10th November 2021?

Landlord's will need to establish if the arrears they are claiming for are Protected Rent Debts.

If proceedings are issued to recover rent arrears after 10th November 2021 then the court might stay claims issued between 10th November 2021 and the date the Act is passed which relate to 'protected rent debts'.  
They may do this at the Tenant's request, or they may do so on their own volition, we do not yet have any clarity on this point. Whilst some commentators are suggesting that it is unlikely to be worth issuing proceedings for those debts at this stage, others suggest that until the new legislation becomes law there may be a further window of opportunity for Landlords?

In the meantime, and during the six-month moratorium post the date of the Act, any judgment debt cannot be enforced.

We will continue to update you as the implications of the new bill and the new legislation becomes apparent.

Posted on 11/12/2021 by Ortolan

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