The current restrictions placed upon commercial landlords in England & Wales for recovering tenant arrears accrued during the pandemic, are due to lift this month. At the same time, legislation to deal with ring-fenced pandemic tenant arrears (Commercial Rent (Coronavirus) Bill 2021)) will come into force. It is estimated that there will be upwards of £8.0 Billion in outstanding tenant arrears by the next quarter day.
Importantly for landlords and tenants, this new legislation will not have the ability to interfere with completed, negotiated settlements. However, arbitrators in the new scheme will be able interfere with money judgments already obtained by a landlord and have the power to cancel the judgment.
Not all arrears will be captured by the legislation and for those arrears falling outside of its scope, landlords may enforce by the more familiar means. For further information relating to which rents will be captured by the legislation and how the arbitration scheme will work, please see our previous blog.
For further information relating to the lifting of restrictions in Scotland, please see our blog here.
What are the implications for the parties?
For landlords, enforcement options such as forfeiture or winding up, may not be the best way forward where the asset is not fit for the current market and there is no desire to take on asset liabilities such as rates. Enforcement can also be costly and protracted, especially where a tenant opposes the action.
For tenants, the pandemic may have hit them hard with no income and little means to pay all arrears or all in one go. But, the new normal and reopening of cities and towns, may have improved their position. Where tenants are shut out of the new legislation, their continued occupation of the premises may be precarious. If a landlord takes enforcement action, likewise, dealing with that process is likely to be expensive and only defeated if all the arrears are paid.
Alternative options
Parties should, therefore, be considering dispute-avoidance processes. This includes communications to see if a negotiated settlement can be agreed. A deal might include a re-gear of lease terms, for example, a lower rent to align more appropriately with market expectations or account for the difficulties experienced by the tenant over the past two years. The parties might agree a rent-free period for a time to give the tenant time to build up some reserves and delay payment of the arrears. The parties might agree a payment plan for the arrears. Simple deals may be recorded in side letters attached to leases or, more substantive ones via a lease variation.
The possible options available to the parties are numerous and varied. The key thing here of course, is dialogue.
Another option to consider is an all-parties without prejudice meeting. Often being in a room (2D or 3D) and able to openly discuss and explain the reason behind decisions, collaborate to explore what each party desires for an outcome and most importantly, to see if the landlord and tenant relationship is salvageable going forward, can break through entrenched positions.
One opportunity sometimes missed by parties at an early stage is pre-action formal mediation. Typically, these last one day and the parties share the cost of the mediator 50/50. In advance of the mediation, the parties will have appointed an independent mediator and agreed a bundle of documents for use by the mediator and the parties on the day. Legal advisors should be involved in this process, to ensure suitability of the mediator, all communications are protected and not disclosable in any future action, as well as ensuring the efficacy of any commercial deal reached on the day.
Mediations can be an incredibly useful tool to achieve resolution or, where that is not possible, it often results in the parties at least having narrowed the extent of the issues between them which can then facilitate continued ongoing settlement communications.
For landlords and tenants who might be looking to utilise the arbitration scheme under the new legislation or, enforcement options when they can, you should be able to show to a court or arbitrator that you have considered dispute-avoidance methods. The parties should have at least attempted to resolve the dispute without pursuing it to court or arbitration, where neither party has control over the decision that will be imposed upon them.
If you are a commercial landlord or tenant dealing with lease arrears and have any concerns or questions about the changes coming into force, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies' contact.
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