The primary principles of the Commercial Rent (Coronavirus) Act 2022 (CR(C)A 2022)
The protections given to commercial tenants during COVID
As is familiar to us all, during the COVID-19 pandemic many businesses nationally were forced to close with the number of people on furlough. At the peak of crisis there were over 10m. people on furlough. Even when they were allowed to re-open, businesses had to adapt to enable social distancing and stagger their staff returning to the work place. This meant that business were left severely curtailing their earnings for long periods of time. As a result, commercial tenants were often finding themselves unable to pay rent and exposed to enforcement action.
On 26 March 2020, the Government intervened with the enactment of Coronavirus Act 2020 (CVA 2020). This placed multiple restrictions on the landlord’s remedies for the non-payment of rent for business tenancies. The CVA 2020 included provisions that prevented landlords from forfeiting a commercial lease and restricted their use of commercial rent arrears recovery (CRAR). In addition, the Corporate Insolvency and Governance Act 2020 limited the ability for landlords to make winding-up or bankruptcy petitions against tenants unable to pay rent.
The effects of the Commercial Rent (Coronavirus) Act 2022 (CR(C)A 2022)
The restrictions that were put in place due to the COVID-19 pandemic have now all lapsed and have been replaced by the new restrictions under CR(C)A 2022.
For the purposes of the CR(C)A 2022, a commercial tenancy is a tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies. A tenancy contracted-out of the 1954 Act is still a tenancy to which Part 2 applies.
The focal point of the legislation is the protection extended to commercial tenants “adversely affected” by Coronavirus regulations in respect of their “protected rent debts”. Protected rent debts include rent, service charges, insurance rent, rent deposits interest and any VAT accrued during a period of occupation within the “protected period”.
The protected period runs from 21 March 2020 to 18 July 2021 in England and 7 August 2021 in Wales, or earlier if a closure requirement applied to the tenant’s specific business. Therefore, it can differ from business to business.
Businesses that never had to close (i.e. pharmacies/supermarkets/post offices) do not qualify for the protections under CR(C)A 2022.
Ringfenced Debts & Landlord Remedies
For a six-month period that ended on 23 September 2022, CR(C)A 2022 placed an arbitration obligation upon the Landlord and Tenant in cases where they can’t reach their own agreements as to a commercial tenant’s lease debt liability.
Provided that a valid referral to statutory arbitration was made on or before 23 September 2022, protected rent debts captured by CR(C)A are ringfenced and referred to arbitration for resolution. The arbitrators have a wide discretion to determine disputes based on the evidence presented by both sides. The arbitrator can write off all or part of the sums due; provide extensions for payments made via instalments (for no more than 24 months) or reduce interest payable under the terms of the lease.
Schedule 2, CR(C)A 2022 precludes landlords from exercising remedies such as debt claims, CRAR, forfeiture and drawing down from a tenant’s rent deposit. Schedule 3 also prohibits winding-up or bankruptcy proceedings in respect of protected rent debts.
However, these restrictions no longer apply unless a valid referral to arbitration was made before 23 September 2022.
Unprotected Rents & Landlord Remedies
Rent debts that fall outside of the protected period are not governed by the Act and such, the previous restrictions on the traditional remedies available to landlords for non-payment of rents, such as forfeiture and exercising CRAR, have now lapsed.
However, this must be handled with caution. In the event that a tenant has protected and unprotected rent debt liability, the landlord must apply the payment first to meet an unprotected rent debt before it is applied to a protected rent debt (unless specified otherwise by the tenant).
Use of such remedies for protected rent debts would be unlawful which could expose a landlord to costs liability for proceedings or further liabilities if the forfeiture leads to loss or damage to the tenant.