The Commercial Rent (Coronavirus) Bill and accompanying Code of practice for commercial property relationships following the Covid-19 pandemic were published on 9 November, initiating an arbitration scheme under which protected rent debts can be written off, reduced or deferred.
Since it is the current tenant who was affected by the lockdown measures and who has accrued the arrears, it is inevitable that the scheme focuses on them and preserving the viability of their business.
However, in many cases, there will be other parties with concomitant liability for the arrears. This could include a guarantor of the current tenant, or former tenants who are liable either under an authorised guarantee agreement or under the old privity of contract rules that apply to pre-1996 leases.
These parties have a keen interest in the outcome, but appear to have a very limited role to play in the proposed scheme.
Moratorium
In the same way that landlords have been suing tenants for pandemic rent arrears, there has been no moratorium preventing landlords from pursuing guarantors and former tenants for the debt.
The good news for guarantors is that Schedule 2 to the bill expressly includes “a person who has guaranteed the obligations of the tenant” within the new moratorium on bringing money claims for protected rent arrears. Schedule 3 similarly includes such persons within the moratorium on winding-up and bankruptcy petitions.
This protection should extend to former tenants who have given an AGA.
The wording used in the bill is unlikely to assist former tenants under “old” tenancies. This is unlikely to be a major problem, however, since rack rent leases that pre-date the Landlord and Tenant (Covenants) Act 1995 are now relatively rare.
Arbitration
Although guarantors and most former tenants will be protected from enforcement action in respect of protected rent debts, they are not otherwise mentioned in the bill or the code.
If the current landlord and tenant negotiate under the code, they are obliged to have regard to “other stakeholders”. Even assuming that nebulous phrase extends to guarantors and former tenants, it stops short of affording them any active role in the negotiations.
If agreement cannot be reached, guarantors and former tenants have no right to instigate arbitration, nor to participate in any arbitration commenced by the landlord or the current tenant.
Even where their respective financial positions makes it more likely that the arrears will ultimately be paid by the guarantor or former tenant, they remain at the mercy of the current tenant’s decisions on whether to negotiate and/or arbitrate and how to pursue and settle those proceedings.
To rub salt into the wound, the bill requires the arbitrator to deny any relief where the current tenant’s business would not be viable, even if relief was granted. The arbitrator has no discretion on this, even where relief could still make a difference to the viability of the guarantor or former tenant’s business.
“Unpaid”
So far, we have considered matters from the perspective of the guarantor or former tenant, but the presence of a guarantor or former tenant raises corresponding issues for the current tenant.
Only “unpaid” rents are protected and can be submitted to arbitration; the only exception to this is where rents have been taken from a rent deposit. If rents that would otherwise be protected are paid by the guarantor or former tenant, those rents fall outside the scheme and the current tenant loses its ability to seek relief via arbitration.
Furthermore, since there is no moratorium on indemnity claims, the current tenant will likely be faced with an indemnity claim from the guarantor or former tenant for the full amount of the debt.
To preserve the possibility of relief under the scheme, the current tenant therefore needs to keep the protected rent debt unpaid. The current tenant will usually have greater influence over its own guarantor than over a former tenant, who may have been served with a section 17 notice from the landlord in respect of the arrears. In some situations, it may already be too late.
Equally, the guarantor or former tenant should not be overly keen to satisfy the debt. They too need to recognise that payment destroys any chance that the amount payable might ultimately be reduced. They must also be cognisant of the financial state of the current tenant, which may render the indemnity claim potentially worthless.
However, there may be situations where the threat of payment allows a well-advised guarantor or (in particular) former tenant to exert pressure on the current tenant to pursue arbitration and to keep them in the loop as matters progress.
An evolving picture
Any major new legislation inevitably has wider consequences than jump out on first reading, and the government’s ambitious scheme to resolve pandemic rent arrears is no exception. More parties have a vested interest in the protected rent debt than just the current landlord and tenant, and actions by any of them can have major implications for the others.
It will be interesting to see whether the position of guarantors and former tenants assumes greater prominence as the bill progresses through parliament.
Bill Chandler is a professional support lawyer at Hill Dickinson LLP
