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Covid Arrears of rent: A Greek Tragedy for Landlords

The Greek dramatist Aeschylus is often credited with introducing the plot device known as Deus ex Machina whereby a seemingly insoluble problem is suddenly and abruptly resolved by...

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Date: 21/06/2021

Authors:

Tim foley colour 2018

Tim Foley

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Alison mould colour 2008

Alison Mould

Partner

Adam Gross

Partner

The Greek dramatist Aeschylus is often credited with introducing the plot device known as Deus ex Machina whereby a seemingly insoluble problem is suddenly and abruptly resolved by an unexpected and unlikely occurrence. As we all know, Boris Johnson is an ardent classicist and it would appear that Government is about to pull a move that is straight out of the annals of Greek tragedy.

On 16 June 2021, in a press release, the Government said it intends to ring-fence COVID 19 commercial rent arrears and that landlords would be expected to make allowances where a business has had to remain closed during the pandemic to “share the financial impact with their tenants”. It also said that there will be extensions to the moratorium on forfeiture for non-payment of rent, the restriction on winding up petitions and on the use of statutory demands, all of with which we are already well-familiar.

What are the proposed changes?

1. The existing restrictions on statutory demands and winding up petitions will be extended to30 September 2021.

2. The existing moratorium on rent related forfeiture of business tenancies will be extended to 25 March 2022.

3. The existing restrictions on commercial rent arrears recovery action (CRAR) will be extended to 25 March 2022.

4. The Government will produce new legislation with rent arrears that have accrued by reason of COVID-19, forcing landlords to agree something with tenants and, in default of agreement, providing for the matter to be settled by binding arbitration. “Covid arrears” will be the March 2020 quarter up to and including the June 2021 quarter, or similarly timed monthly payments.

When will it happen?

The legislation will be published at some unknown point in the future.

What will it say?

The new legislation is expected to detail how landlords and tenants will be encouraged to come to negotiated agreements over the payment of arrears, and where agreement cannot be reached then landlords and tenants will have to submit to “binding arbitration”. Needless to say, the devil is in the detail all of which is currently unknown. One assumes however that the Government is not proposing binding arbitration if that arbitration is simply going to replicate what otherwise would have happened before a county court. Since the court has jurisdiction to order payment plans for COVID debts already, we expect the Government has in mind something further.

What do we think?

At first blush it would appear that the proposal is not without its problems.

Here are some of our initial thoughts:

  • It may be unconstitutional: arbitration is a consensual process. One of the three remaining clauses of Magna Carta in our statute book deals with rights to justice and due process before the courts. Where parties have agreed to arbitrate, the arbitration clause will set out the types of disputes falling within the ambit of that clause that will be dealt with by arbitration. The effect of this agreement is to oust the jurisdiction of the court insofar as it relates to dealing with the dispute at first instance. The court only has a role arising from an arbitrated dispute on appeal. However, if parties are to have arbitration imposed upon them, then that appears unconstitutional, as the recourse to court proceedings is removed.
  • It lacks certainty: save for a few cases where tenants have argued the lease has an implied term that rent is not payable during the pandemic or that the lease has been frustrated, most landlords are confidently issuing proceedings relying on the clear contractual terms as to when and how much rent falls due. That certainty will, we expect, be taken away.
  • Extent of the arbitrator’s powers: will the arbitrator have jurisdiction to with deal defences of implied terms and frustration, or will it solely deal with how much, if any, of the COVID arrears should be deferred or waived and, if deferred, the terms of the deferral?
  • Issues for the arbitrator to consider and the potential for unfairness: The notion of the financial impact being “shared” between landlord and tenant is to indicate that if the parties cannot agree how that calculation is to be done, then the arbitrator will decide how the business impact is to be shared. This would suggest a power in the hands of the arbitrator to release or extinguish arrears based upon the circumstances of the case and what is reasonable and just. If this is the case, then this appears to be all upside for tenants and all downside for landlords (save, perhaps, for the potential liability for costs for the tenant if it is unsuccessful). Further, what considerations will the arbitrator and parties to take into account? Possibly there will be a requirement for the parties to disclose their financial records but, if that happens, how much weight should be given to this without it being unfair? Landlords may say they ought to be entitled to the sums to which they contractually agreed and they should not bear the risk of tenants who have chosen to run their business poorly, irrespective of Covid. Conversely, tenants may say it should not be bound to pay more because of the landlord’s structure and/or costs. What if this site is one of many that the tenant occupies are landlords to be paid pari passu?
  • Arbitration is expensive. Unlike court proceedings, arbitration is a wholly private process where the arbitrator has to be paid by the parties, and a venue has to be found and hired so that the arbitration can take place. Contrast the with court proceedings where, provided the Claimant pays the court issue (5% of the claim value up to a maximum of £10,000) and listing fee (£1,090), they have their disputes adjudicated in court rooms that are provided free of charge and by a judge for whom they do not pay.
  • Uncertainty with existing claims: what is going to be done about the myriad of debt collection claims that currently are pending before the courts where landlords are suing tenants for arrears of rent? Are those claims going to be lifted and shifted into the world of arbitration? This might free up the overburdened county court system, but it simply moves an existing bottleneck elsewhere. If existing claims are going to remain within the county court system, will they be stayed? If not, then judges dealing with summary judgment applications in the weeks to come prior to the publication of legislation are going to find themselves in an invidious position, having to apply the law as it stands but knowing that a different result might be arrived at in a few weeks hence.

Conclusion

For many the last 15 months has felt like a long Greek tragedy. The Government is up for what we hope is the end game, the end might be the most tragic part of the play for landlords, as arrears that they thought would be collected one day, may only now be recoverable in part or perhaps not at all.

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