Katherine Campbell considers what lies ahead for the commercial property rent crisis.
Recently published figures showed that, during the three months between July and September this year, only 20 company voluntary arrangements were carried out, a record low for any quarter in the last 10 years. This was 68% fewer than in the same period in 2020 and 78% fewer than in 2019.
In comparison, the monthly September 2021 insolvency statistics show the total number of company insolvencies across the UK were at their highest level since the start of the lockdown in March 2020 and in line with pre-pandemic levels. This is largely due to the number of voluntary liquidations being significantly up on both 2020 and 2019 levels.
Taken together, these two sets of figures suggest we may have had the “clear out” of the more major companies in the retail and leisure industries seeking to restructure their business through a CVA. Moreover, it appears that what we are now seeing is the demise of those smaller enterprises who clung on during the pandemic but have now lost the fight.
The arbitration scheme
The recently published Commercial Rent (Coronavirus) Bill sets out further restrictions on actions that landlords can take in respect of commercial rent debt, which is likely to heavily impact on insolvency trends going forward into Spring 2022. This is an issue which is clearly in the forefront of the government’s mind when one considers the thinking behind the arbitration process put forward in the Bill.
The Bill provides some detail on the arbitration process that landlord and tenants will be encouraged to participate in to resolve the payment of rent debt incurred during what is termed the “protected period”. In broad terms, this is the period during which a tenant was subject to government mandated closure in its sector between March 2020 and July 2021 (August in Wales).
The arbitration process can’t be used if the tenant is in a CVA, an individual voluntary arrangement or any other arrangement. The role of the arbitrator is to consider whether to grant relief to the tenant and what that relief should be, subject to a maximum timeframe of 24 months for repayment of the debt. However, the arbitrator can dismiss any application if it appears the parties had effectively come to an agreement on the matter of rent payments before the reference was made, meaning neither landlord nor tenant can have a second bite of the cherry.
The arbitrator will also be able to dismiss the application if the tenant’s business is not viable even if relief were to be given, a decision which one would expect to lead fairly swiftly to the tenant’s voluntary liquidation.
The decision will be binding and is aimed at preserving the viability of the tenant’s business so far as that is consistent with preserving the landlord’s solvency. The overriding objective of the process is that tenants, where possible, should meet their obligations to pay rent in full without delay.
Also included within the Bill is a moratorium running from the date when it becomes law until either the last date on which a claim could have been referred to arbitration (if it wasn’t) or the date of conclusion of the arbitration. During this period, landlords will not be able to:
- issue a claim in court for a protected rent debt;
- instruct bailiffs to carry out enforcement under their commercial rent arrears recovery powers for the debt;
- forfeit the lease for the debt;
- use a rent deposit for the debt and, if a rent deposit was used before the moratorium period to pay a protected rent debt, the tenant is not required to make good any shortfall before the end of the moratorium; or
- wind up a tenant for the debt.
Furthermore, a claim issued for a protected rent debt between 10 November 2021 and the date on which the Bill is passed can be stayed at the request of either party in order for it to be resolved outside court. On such application, the court must order a stay.
If a judgment is given in respect of a claim for a protected rent debt issued after 10 November 2021 which remains unpaid during the moratorium, then relief may still be obtained through the arbitration process or by agreement between the parties. Any unpaid judgment cannot otherwise be enforced in respect of a protected rent debt before the end of the moratorium. If relief is given the judgment debt will be altered in accordance with the award or the agreement.
Landlords cannot, therefore, issue proceedings for a protected rent debt now without the risk of it being stayed and can’t enforce a judgment for a protected rent debt during the moratorium. It is still possible to proceed for that part of a debt that isn’t a protected rent debt, however there is a provision in the Bill that prohibits unallocated rent payments from being used to pay protected rent debt in preference to non-protected rent debt. Landlords therefore can’t juggle the books to show only non-protected rent debt outstanding.
Where does this leave us?
The overriding message is that tenants are encouraged to pay in full where they can. The arbitration process is to be viewed as a “last resort” and focuses on the financial means of both landlords and tenants. The process requires evidence to be given by tenants that their businesses have been detrimentally affected by the periods of enforced closure and that their business would not be viable if they are forced to pay the full amount of the arrears.
Equally, landlords are encouraged to provide evidence of their own insolvency risk if the arrears are not paid. Throughout the process, parties are encouraged to be transparent and request evidence of the financial performance of each other’s business during any period where arrears remain outstanding. This is a level of transparency that has been lacking in certain quarters up to now.
Given these latest developments from the Bill, this raises the question as to what will happen to existing judgments for protected rent debt and whether it will be possible to issue a winding-up petition in respect of those. It certainly looks like this will be “difficult”. This could therefore mean the expected avalanche of compulsory winding-up petitions in the commercial property sector is looking less and less likely and that the heyday of the CVA may be coming to an end.
Katherine Campbell is a counsel at Reed Smith
