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New law on business rent arrears supporting North East firms’ COVID recovery

04 Apr 2022

One of the inevitable consequences of North East businesses having to shut down or limit their operations at different times during the two years of the pandemic has been that many of them simply haven’t had the chance to earn enough money to pay their rent.

In ordinary times, commercial landlords have the right to take a range of different steps to recover any rent arrears, which can include forfeiture actions to recover possession due to accrued arrears, which will end the tenant’s occupation of the business premises.

Given the unique set of circumstances, the Government temporarily suspended this option as part of the wider measures it introduced two years ago to protect companies in pandemic-related financial distress, a move which has undoubtedly stopped a great many North East firms from going out of business.

With the gradual reopening of the economy over recent months, we’ve been moving towards these temporary rules being phased out, with the moratorium on forfeiture relating to rent arrears finally, in some cases, ending last week.

Despite often lacking their usual income, landlords have still had their own financial responsibilities to meet over the last two years, including mortgages, insurances, maintenance costs and utility bills, and they will be understandably keen to now recover all the money they’re owed.

However, from the government’s point of view, it clearly makes little sense for them to have used so much taxpayers’ money to support businesses for two long years only to leave these firms to their own devices at a point where many are still not able to generate the same revenues that they did before the pandemic.

With this in mind, a new law has just come onto the statute books which gives struggling North East firms more time and opportunity to pay off their rent arrears, and it will doubtless be a big weight off many regional business owners’ minds to know that, in most cases, they’re not going to have to settle all their arrears straight away.

The new Commercial Rent (Coronavirus) Act makes ‘provisions enabling relief from payment of certain rent debts under business tenancies adversely affected by coronavirus to be available through arbitration.’

And while landlords can once again take action to retrieve rent-related debts, some restrictions still apply as to the sums that can be recovered, including where the landlord only seeks recovery of the arrears rather than forfeiture.

 

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The new law divides these debts into ‘protected’ and ‘unprotected’ sums, with the former having been accrued when tenant businesses were operating under any Covid-related restrictions.

This doesn’t just apply to when the business had to shut its doors completely, but also to situations like having to close earlier than usual or limit the number of customers they could have in their premises.

Commercial landlords can only currently take action (including forfeiture and money judgment claims) to recover unprotected debts, with provisions in place to allocate payments made by the tenant to clear unprotected debts first.  Any claims in respect of ‘protected sums’ must either be referred to arbitration or put off for at least six months.

Landlords and tenants are being encouraged to negotiate agreements about how and when rental debts are settled using the Act’s Code of Practice, with a new binding arbitration system in place as a last resort for eligible businesses if they can’t agree.

How the new rules will actually work will only become clear as they are applied in practice.  The government’s clear hope is that agreements can be reached before situations reach the arbitration stage, and a continuing focus on collaboration makes sense from both sides.

Landlords may find it difficult to replace a tenant in the present economic circumstances, while agree to receive what they’re owed over a longer time as their tenant gets back to full speed would seem to be a much better option than pushing too hard to recover their money too quickly and so losing out altogether.

From a wider perspective, the North East economy has an awful lot of lost ground to make up, and the sooner we have as many businesses as possible trading at or hopefully ahead of their pre-pandemic levels, the better it will be for all of us.

For further information or to find out how we can help, please do not hesitate to get in touch with Julia Adams via julie.adams@hay-kilner.co.uk or 0191 227 6665.