The new rules coming for rent arrears tenants and commercial landlords need to know about
They recently announced that trading at its out-of-town retail parks was almost back to pre pandemic levels and that as a result rent collection had improved across its portfolio.
This is encouraging as footfall and sales at their covered shopping mall properties remain at 75% and 89% of 2019 respectively.
Despite rent falling sharply during the pandemic and lockdown periods, British Land collected 85% of the £87 million due in rent during the June quarter, up from 72% collected in December. They received 91% of rent due in the March quarter so industry experts will be watching the September take closely.
The company has already informed tenants that “with trading restrictions substantially lifted and the vast majority of our customers trading well and paying the rent due, we do not expect to make further concessions this quarter”.
There will be no more rent concessions or write offs forthcoming from Hammerson either.
The owners of the Birmingham Bull Ring and Brent Cross shopping centre in London have also warned tenants that “all avenues to collect rents due are being pursued.”
They said they had waived, written off or not collected £26 million of rent due in 2020 and £15 million due so far for 2021.
This contributed to their only collecting 62% of the £154 million due in total rent this year and still have 11% of their annual £264 million rent take outstanding from last year.
“Many retailers continue to report high sales and conversion rates as visitors shop with purpose”, Hammerson said.
Commercial tenants who owe outstanding rent should expect that their landlords will also act with purpose from September onwards to recoup outstanding debts once the restrictions on creditor recovery actions ends on the last day of the month.
The announcements come ahead of news that the government is planning to bring forward new insolvency legislation aimed at protecting businesses from accrued debt and rent arrears as a result of the pandemic.
A policy paper has been published with new provisions that will ringfence rent arrears caused by “enforced closures” and introduce a process of binding arbitration between landlords and their commercial tenants.
The British Property Federation (BPF) reported that UK businesses had built up a combined £7.5 billion of commercial rent arrears up to June 30 2021 due to the overall impact of Covid-19.
According to the published guidance, the new provisions will be a backstop or a last resort to be used where landlords and tenants haven’t been able to settle a dispute and come to a mutual settlement on how rent arrears will be paid.
They will be published before any system is put into law to give landlords and tenants the necessary time and motivation to negotiate.
A spokesperson said: “As soon as legislation is passed, the commercial tenant protection measures will only apply to ring fenced arrears. This includes rent debt accrued from March 2020 by commercial tenants affected by Covid-19 business closures until restrictions for their sector are removed.
“This means that landlords will still be able to evict tenants for the non-payment of rent prior to March 2020 and after the end of restrictions for their sector and who have not been affected by business closures during this period.”
The new rules will come in addition to the amendment to Section 82 of the Coronavirus Act 2020 which prevents landlords of commercial properties from evicting tenants for the non-payment of rent until March 25 2022.
Landlords are being prevented from using CRAR unless the tenant owes 554 days’ rent by June 24 2021 but this amount may change once the restriction lapses.
In reality, all of this means that it’s a return to normal contractual arrangements under the terms of the signed lease for tenants that are able to pay their rent arrears in full and weren’t affected by closures.
It also stipulates directly that it doesn’t include any debts accrued outside the ring fenced period.
The aim of the arbitration is to be an “impartial and manageable process” and a faster or easier alternative to going through the courts. The government does expect that landlords and tenants both contribute to the cost of the arbitration if they are both found to have negotiated in good faith.
The arbitrator will also have the power to award the whole cost of arbitration to one side if they find the other party has not been entering into the spirit of the agreement.
So we know the roadmap and what’s going to happen but what is the situation for businesses with rent arrears now?
In short, the government expects companies that are open and trading normally to pay their ongoing rent in full according to their lease terms. If they’ve agreed different conditions with their landlords then they should stick to them – normal operation periods are not covered under the new rules.
To help their case, and avoid any doubt, if tenants have any arrears covered by the ringfenced period, they should state in writing to their landlord what time period payments they make should be apportioned to.
Landlords can charge interest on rent incurred from the end of the ring fenced period onwards if interest payments are included in the lease terms. Also if the tenants breach any other lease terms which could give rise to forfeiture (e.g. property damage) then the landlord is still able to evict them on that basis.
Can a landlord enforce rent arrears at the moment?
Even though the legislation is on its way, don’t think that landlords are powerless to bring enforcement action against delinquent tenants.
They still have a range of options available to them including:-
- Claim against any current rent guarantors
- Use any rent deposits as a draw down and seek a top-up to replace it
- If the lease was signed after 1996, they could claim against Authorised Guarantee Agreements or Guarantees of Authorised Guarantee Agreements
- Issue claims against former tenants or former guarantors of pre-1996 leases
- Issue possession proceedings on the basis of breach of covenant other than non-payment of rent
The ultimate aim of the legislation is to help viable businesses continue to trade their way back to profitability and pay off any rent debts or arrears that are genuinely down to the pandemic.
Some landlords and tenants had already made agreements on rents but there are always some who can’t or won’t reach a compromise which the arbitration will help move to a conclusion.
There will be others who suspect that the moratorium on evictions is being used as an unfair tool to avoid paying rent and that it will give them the necessary leverage to definitively resolve the outstanding situation.
One area where there could be clearer indications of intent from the government is how businesses in sectors which moved between trading restrictions during the pandemic will be treated.
This includes non-essential retailers and eat-in restaurants that were subject to restrictions but were still able to trade such as if the restaurant offered a takeaway or pick-up meal delivery service.
Like any new legislation, expect it to be tested by individual circumstances early after it’s rolled out.
Rent arrears, like unpaid bounce back loans and outstanding business rates debt, might seem like an immovable object against the irresistible force of a landlord eager for repayment but if you can’t go through a problem, you can always go around it.
Unmanageable debt built up during the pandemic might appear to be a terminal issue but it needn’t be.
Once you get in touch with us to arrange a free initial consultation, we can help you take stock of your situation and plan a manageable and achievable forward roadmap to follow.
Whether it’s to create a restructuring and rescue plan that would be acceptable to your creditors or if an orderly liquidation is the only way forward – we can explain all the options and steps needed to bring you and your business to their next stage.