New laws and Code of Practice for commercial rent arrears – what does it mean for you?
Alex Walmsley, solicitor in our property litigation team at Harrison Drury, looks at the government’s newly announced Commercial Rent (Coronavirus) Bill and new Code of Practice for commercial rent arrears and the implications for commercial property landlords and tenants.
With the unprecedented economic shock of the pandemic, the government had no choice but to step in last year to introduce laws protecting from eviction commercial tenants unable to pay their rent because of lockdowns and business interruption.
This protection has been extended several times and is currently in place until 25 March 2022. However, as the economy starts bouncing back there are inevitable disputes between landlords and tenants over how to settle the commercial rent arrears accrued during the pandemic.
This has prompted the government to issue a new Code of Practice (effective from 9 November 2021) underpinning negotiations between landlords and tenants and to introduce a new Commercial Rent (Coronavirus) Bill.
The latter will establish a legally binding arbitration process for commercial landlords and tenants who have not already reached and agreement by following the Code of Practice.
The Code of Practice and new legislation has been welcomed by business leaders, including from the particularly hard-hit hospitality sector. Kate Nicholls, chief executive of trade body UK Hospitality, said the continued emphasis on negotiation was “vitally important”.
What’s in the Code of Practice for commercial rent arrears?
The new Code of Practice, which applies across the UK, was announced by business secretary Kwasi Kwarteng on November 9. It states that in the first instance, tenants unable to pay in full should negotiate with their landlord and attempt to agree some form of payment arrangement or a waiver of some or all of the rent arrears.
Where landlords and tenants are struggling to reach agreement the Code of Practice also promotes forms of alternative dispute resolution such as mediation if the parties wish to pursue this.
It’s worth pointing out here that a survey from the British Property Federation suggests that agreement on the treatment of rent arrears has been reached in more than 80% of cases since the start of the pandemic.
What new laws does the new Commercial Rent (Coronavirus) Bill include?
Subject to passage through parliament, the new Bill will introduce a binding arbitration system to resolve commercial rent debts accrued during the pandemic for those landlords and tenants who have still not been able to reach an agreement.
The laws apply to businesses which were mandated to close, in full or in part, from March 2020 until the date restrictions ended for their sector. Commercial rent debts accrued at other times will not be in the scope of the legislation.
Either party will be able to apply for arbitration unilaterally as a backstop after negotiations have failed. However, parties are free to continue to negotiate outside of the legal arbitration process once it comes into force.
The government intends for the new legal arbitration process to come into force from 25 March 2022. The window to apply for arbitration will be six months from the date the legislation comes into force, with a maximum timeframe to repay of 24 months.
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