With rumours of a fresh extension of the moratorium, Peter Bourke and Dellah Gilbert round up views of Property Litigation Association members on what should eventually follow.
With the scheduled expiry date for the moratorium on rent arrears recovery only days away, subject to a potential extension beyond 30 June, tenants and landlords must be wondering what will happen when it does finally come to an end. The government’s call for evidence on commercial rents and Covid-19 suggested six different options, varying in scope and focus. As part of its response, the Property Litigation Association canvassed its 1,400-strong membership on which options were preferred, eliciting equally varied views.
More time to pay?
Property lawyers were divided on the detail going forward, often reflecting whether they largely represented landlords or tenants. But on one point, especially, most agreed: commercial tenants should be given more time to pay rent arrears where they need it.
The PLA also favours ringfencing Covid arrears, distinguishing between rent arrears accrued during Covid trading restrictions and obligations going forward after the moratorium ultimately ends..
Aligned to this would be a disciplined regime of a structured debt repayment and sanctuary from sanctions provided the payments are made. If instalment payments are made on time, landlord remedies (such as commercial rent arrears recovery, forfeiture and insolvency procedures) should remain restricted. However, if any payments are missed, remedies should then be reinstated.
Provided the time periods are sensible (and the timeframes may differ between occupation types), this should redress the current imbalance between landlords and tenants in what we consider to be a fair and reasonable way.
Code of practice
Looking at the survey findings in more detail, 72% of respondents said the government’s code of practice was ineffective, with most believing it had no teeth. This was underscored by the recent decision of Chief Master Marsh in Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863 (Ch); [2021] PLSCS 74, determining that a landlord is not bound to follow the code before seeking the court’s assistance in recovering rent arrears. Most lawyers, on both sides of the fence, also agreed there has been more than adequate time for negotiations during the pandemic.
Option 1: all restrictions lifted
Although landlord lawyers thought removing all restrictions would be fairer to their clients, they did not believe landlords would forfeit tenants’ leases, even if they had the power to do so, as it could result in empty premises and a rates liability. It would also be detrimental to the bricks-and-mortar retail environment generally. Tenant lawyers, naturally, had a different view, believing the fear of forfeiture could be used to pressurise tenants, perhaps unfairly.
Both landlord and tenant lawyers accepted this option would invariably force some tenants out of business, but also recognised that some were already failing and had been kept afloat by the moratorium. Some sectors would be disproportionately affected by the removal of all restrictions, especially those that had been prevented from opening and whose businesses do not lend themselves to online trading, such as hospitality and leisure. The concern is that these businesses would be unable to satisfy the debt to obtain relief from forfeiture, should their landlord take that step.
Option 2: reinstatement of forfeiture but continued CRAR and insolvency restrictions
This option does not take matters much further forward, given that most landlords are unlikely to resort to forfeiture without the certainty either of the tenant applying for relief or another tenant to take the space. If insolvency restrictions remain in place, there is also a risk that savvy tenants with a chain of properties will use the reinstatement of forfeiture as the basis to offload properties of their choosing, as landlords will be left with little option where a tenant effectively abandons future use of the space.
Option 3: targeting of measures
Most landlord and tenant lawyers agreed that more favourable measures should be targeted towards those who were fully closed during the pandemic and, to a lesser extent, those who could trade but on a restricted basis.
While there were many suggestions of how measures could be targeted, the one that stood out was the phased withdrawal approach. Provided structured payments were made, the tenant would continue to trade, and the landlord would, albeit late, receive the sums due. The “encouragement” to make this work is the continued suspension of sanctions.
Option 4: mediation
Most respondents believed that mediation was not the way forward for rent arrears and had not used this method to settle rent arrear disputes. Of those that had, 80% of landlord lawyers and 71% of tenant lawyers reported that they had been largely unsuccessful. The main reason given was the lack of engagement by the parties, with cost also a factor.
Options 5 and 6: adjudication (binding and non-binding)
Our members felt strongly that it would be wrong, as a matter of principle, for an adjudicator to be able to interfere with the contractual bargain between parties. Such interference could have long-term ramifications to an urgent, short-term problem. In essence, it is not an appropriate solution.
The road back
Everybody knows that getting back to normality is not without difficulty. At some stage, the safety net must be removed so that the market can function again, but removing all restrictions is likely to have significant adverse consequences.
The PLA believes the political art will be finessing a “carrot and stick” approach. The carrot is to give tenants a sufficient timeframe to meet their existing obligations, with a prohibition on sanctions provided those payments are made along with future obligations as they fall due. The stick is to make sanctions available to the landlord if these structured payments and ongoing obligations are not met.
Peter Bourke is a partner in the property disputes team at Wilsons and Dellah Gilbert is a partner and head of property litigation at Maples Teesdale. Bourke is chair and Gilbert is a member of the PLA’s Law Reform Committee
