Rent moratorium, arbitration and recent judgment for landlords

The Coronavirus Act 2020 currently prevents landlords evicting commercial tenants for non-payment of rent. This restriction will, in principle, remain in place until 25 March 2022. This rent moratorium was first introduced in March 2020 as part of the Government’s package of Coronavirus measures, and was initially due to end in June 2020, but was then extended for a further nine months, pending the introduction of new legislation.

In part, the extension of the moratorium was to protect commercial tenants from eviction and seizure of stock – actions which were considered overly aggressive when tenants had been largely unable to run their businesses as a result of COVID-19 lockdowns – but, in addition, it was felt that this stay of proceedings would allow landlords and tenants to negotiate and settle rent arrears.

The Government has now confirmed that it will legislate to ringfence rent arrears which have accrued because a tenant’s business has been affected by the pandemic; the aim being to preserve businesses and jobs affected by enforced closures.

The new legislation will establish a last-resort binding arbitration process, in the event that a landlord and tenant have been unable to reach a negotiated agreement. It will also suggest a number of alternatives to eviction, such as:

• re-payment plans (long term or short term);
• landlord agreeing to waive some of the arrears;
• rent free periods;
• deferral of rent payments;
• rental reductions to reflect current market rates and/or turnover;
• landlords taking rental deposits without tenants topping up;
• landlord waiving default interest on rent arrears;
• parties splitting the rental cost during the periods of non-occupation;
• removal of tenant break rights.

Tenants seeking a reduction of rent arrears during negotiations should be prepared to provide financial information to the landlord explaining why they need a concession or long-term repayment plan. Landlords refusing concessions will need to provide explanations as to why concessions are not being given. 

If the parties cannot reach agreement in relation to the rent arrears, the parties should proceed with the new legally binding arbitration process, which is intended to be impartial, and faster and less expensive than going through the courts.

However, the Government has made it clear that tenants should pay their rent if they have not been affected by closures and, even if they have, they should pay their rent from the point at which restrictions were lifted in their sector.  That said, it also expects landlords to share the financial burden with the tenants, where they are able to.

Once the legislation is in place, landlords will be able to evict tenants:

• for rent arrears accrued before March 2020 and after the ringfenced period even where the tenant has been affected by the pandemic; and
• not affected by the pandemic for rent arrears accrued at any time.

Landlords also have the right to evict tenants for other breaches such as property damage.

The Government expects both landlords and tenants to contribute to the cost of arbitration. However, the arbitrator will usually have the power to determine the proportion in which the costs of the arbitration should be split (or even that one party should bear all the costs, where that party has not acted in good faith).

The Government has published a Code of Practice to promote good practice between landlords and tenants. The Code is voluntary and does not change the existing terms of a lease, but establishes a framework for how landlords and tenants can work together when dealing with rent arrears. We understand that the Government will revise the Code before the new legislation becomes effective, to provide guidance in relation to negotiations and arbitration.

As things stand, there are some concerns in relation to the new legislation, and the current Code. For example, the period of ringfencing is not clearly set out, and it is also not always possible to identify the point at which restrictions lifted in certain sectors, as restrictions were eased gradually, and some businesses will have adopted a more cautious approach than others and could therefore arguably have been impacted by COVID-19 for longer than was strictly necessary. It is difficult to imagine how such actions would be viewed by an arbitrator.

To add to the uncertainty, judgment was handed down yesterday in the case of London Trocadero (2015) LLP v PicturehouseCinemas Ltd, in which the landlord was victorious in its £2.9m claim for rent arrears. Not only does this hot-off-the-press judgment tip the legal balance in favour of landlords, but we also noted with interest that the tenant’s request to adjourn proceedings, pending the new legislation announced by the Government, was dismissed.

We expect further details from the Government in due course, and of course we’ll be keeping an eye on further developments in case law, so please keep an eye on our website and across our Social Media pages, where updates will be published.