Brought in with the intention of protecting viable businesses from eviction or other enforcement measures in relation to rental arrears accrued as a result of COVID-19 lockdown restrictions, the arbitration scheme (the “Scheme”) provided for under the Commercial Rents (Coronavirus) Act 2022 (the “Act”) has now ended.
Its expiry sees the lifting of all remaining restrictions on winding-up petitions and Commercial Rent Arrears Recovery (CRAR) action introduced in an effort to protect businesses. As a result, no further referrals can be made under the Scheme and for landlords, all rights and remedies are restored.
The Act introduced the Scheme, allowing for an arbitrator to issue a legally binding decision to in whole or part write off pandemic related rent arrears and/or allow tenants time to pay, whilst also detailing continued restrictions in relation to forfeiture, winding-up petitions and CRAR. The aim being to protect viable businesses and the jobs they provide from the unprecedented measures imposed in response to the pandemic. Initially, the government’s expectation was a relatively low estimate of 7,500 cases which would go to arbitration but the Scheme may have been even less popular than expected. According to the Property Litigation Association, up to August 2022, only 5% of those polled had made a referral under the Scheme, leaving a question mark over what has happened with the backlog of rent arrears that built up during the pandemic of around £8 billion.
There remains little clarity on the reasoning for the underuse of the Scheme, but one possibility is that landlords may have simply chosen to “wait it out”. Waiting six months for the Scheme to expire (and for all of their rights to be restored) may have been more appealing than going to the time and expense of resolving the matter through arbitration. For tenants, negotiating payment may also have been preferable to the unappealing reality of having to argue about the viability of their business before an arbitrator.
One further possibility was that tenants were awaiting the Court of Appeal’s decisions in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others alongside Bank of New York Mellon (International) Ltd v Cine-UK Ltd where the tenants sought to argue that rent should not be payable at all for periods in which they were prevented from trading due to lockdown restrictions. No doubt, any help that tenants considering arbitration may have hoped for, fell by the wayside when the Court of Appeal came down entirely in favour of the landlords.
Regardless of the reason for the lack of uptake, it remains highly likely that there is still a sizeable level of unpaid COVID-19 rent arrears remaining. The question is what will happen now?
What will happen now the Scheme has come to an end?
For landlords, who can easily re-let (potentially at a higher premium) we would expect to see an uptick in enforcement action. As already mentioned, it may have been the case that landlords were simply waiting for tenants to miss the deadline for making a referral, to enable them to now seek payment in full, or to give them an option to re-take possession if the tenant does not now pay. If that happens will we see an uptake in CVAs or other insolvency procedures? It is difficult to say without greater knowledge of the individual circumstances but threats of enforcement action when tenants face other cash flow pressures may see many businesses tip over the edge.
The other possibility is that very little will happen.
For those landlords that are content that they have a paying tenant (bearing in mind that the Scheme only applied to certain COVID rents and tenants have had to pay rent in accordance with lease terms for over a year now) they may choose to do nothing – preferring to have a paying tenant in situ rather than an empty property.
Or, the cheaper and preferable route may simply be for the parties to reach a commercial agreement without the threat of one party seeking to arbitrate the matter.
The exact impact of the Scheme’s expiry remains unclear but there is no doubt that there is potential for an uptake in rent arrears disputes which may accompany the end of COVID-19 related legislative protection.