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How are the Courts dealing with COVID-related rental arrears?

The pandemic has resulted in revenue shortages and subsequent problems in meeting obligations, including the payment of rents and ancillary costs. We answer what options are available to tenants who are unable to meet rental payments.

With the Covid-19 pandemic, different kinds of regulations have been passed that have led to multiple business restrictions, mainly affecting retail as well as services in large commercial enterprises and the hospitality sector as well. This has resulted in pandemic-related revenue shortages and subsequent problems in meeting obligations, including the payment of rents and ancillary costs.

This raises the question of whether and to what extent tenants can claim a rent reduction from their landlords. In the UK, tenants have no legal backing on which tenants can rely on to force landlords to reduce rents or write-off COVID-19 arrears.

However, there is some support and protection against landlord enforcement action for non-payment of rent and the government is also considering legislation to “ring-fence” COVID-19 arrears.

How are tenants being protected from rental enforcement action?

In the United Kingdom, there are a number of on-going measures to support and protect tenants from landlord enforcement action for non-payment of rent. These are broadly as follows:

  • There is a moratorium until 25 March 2022 on landlords evicting commercial tenants.
  • The Commercial Rent Arrears Recovery (CRAR) process (a statutory procedure which allows landlords of commercial premises to recover rent arrears by taking control of the tenant’s goods and selling them) can only be used if tenants owe at least 544 days of principal rent.
  • There is ban until 31 March 2022 on landlords issuing statutory demands and winding up petitions based on a tenant’s inability to pay commercial rent (unless the landlord has reasonable grounds for believing that either COVID-19 has not had a financial effect on the tenant or that the circumstances forming the basis of the winding up petition would have occurred even if COVID-19 had not had a financial effect on the company).

However, despite the above there is no legal help for tenants to legally compel a landlord to reduce or write-off COVID-19 arrears that have built up while premises have been closed.

What are the government doing to protect tenants?

The Government is clearly concerned about the raft of potential insolvencies (and subsequent job losses) that may result if the restrictions mentioned above are simply left to expire. It is therefore currently consulting on the options available to deal with COVID-19 arrears and one of the proposals under consideration is binding adjudication in circumstances where the landlord and the tenant cannot reach a mutually acceptable settlement.

Problems with the government’s legislative plans on Covid-19 rental arrears

Whilst the consultation is on-going the Government’s legislative plans on COVID-19 arrears remain unclear and commercial landlords and tenants have a number of unanswered questions. For example, which arrears are “ring-fenced” and subject to arbitration if not agreed? What about tenants that have chosen, perhaps for commercial reasons, to remain closed? Will the legislation unravel any concessionary deals that have already been reached, including if the tenant insists that it still cannot pay? Will tenants that have already paid in full be entitled to refunds? Will the legislation be restricted to rent or will it include, for example, service charges?

The Government has said that the ring-fencing will only apply to tenants that have been “impacted” or “affected” by COVID-19 “business closures” for the period from March 2020 until restrictions for their sector were removed. Commercial landlords can take some comfort from the fact that this at least suggests that rent will not be ring-fenced where it relates to periods where tenants elected to close during the pandemic.

Tensions between landlords and tenants over built up arrears are, therefore, set to continue and parties will have to await further details as the legislation is published before at least some of their questions are answered.

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