Blake Morgan Partner Paul Caldicott looks at the changes that have come into force on Commercial Rent Arrears Recovery (CRAR) due to COVID-19. This article was first published in IRRV Insights June edition.
The COVID-19 pandemic has resulted in many different restrictions and changes to insolvency proceedings in order to protect businesses at a time when times were tough. This was due to businesses being forced to close down during lockdowns causing loss of income. Due to these difficulties, restrictions were put in place to protect individuals and businesses from insolvency.
Commercial Rent Arrears Recovery
Before the pandemic hit, the provisions allowed that only seven days’ of unpaid rent was needed in order for landlords to seek CRAR. These restrictions were extended due to the pandemic resulting in the below changes:
- 189 days’ rent on or after 24 June 2020
- 276 days’ rent on or after 29 September 2020
- 366 days’ rent on or after 25 December 2020
- 457 days’ rent on or after 25 March 2021
- 554 days’ rent on or after 24 June 2021
Non-payment would usually enable the landlord to re-enter the premises and change the locks, effectively ending the lease, but these provisions restricted landlords from being able to do this and having to wait significantly longer before being able to seek recovery of their premises. These provisions were put in place until 25 March 2022 when they were reviewed again. This review resulted in a new bill for Commercial Rent (Coronavirus) Act 2022 which came into effect on the same day, this act came into effect to give companies some protection following the pandemic. It is important to note that the act is only applicable to those businesses who have been affected by the pandemic, for example if they were forced to close and unable to trade at all during the periods of national lockdowns.
Commercial Rent (Coronavirus) Act 2022
The Commercial Rent (Coronavirus) Act 2022 allows eligible firms to be protected for the next six months if their business was affected due to the pandemic. In order for the act to become applicable, the business’ unpaid rent must have been accrued during a protected period, being between 21 March 2020 until the restrictions ended in relation to that company or type of business. This means that if the company was a retail shop, the protected period would be between 21 March 2020 to 15 June 2020, being when shops could re-open.
The new process that landlords must follow requires them to negotiate an agreement with the tenant using the new code of practice provided by the government. The landlord and tenant must try to reach an agreement between themselves and if an agreement cannot be reached then the arbitration scheme can be used, the scheme is therefore used as a last resort, should the parties remain in dispute. However, in order to proceed with the arbitration scheme, the tenant must not be in the middle of any insolvency proceedings and it must be clear that although the company may be unable to pay the unpaid rent accrued during the protected period, their business would survive if they were to be given a grant payment from the government.
Finally, the arbitration system is legally binding, which means that the outcome reached from the hearing is final. It is important to note that once a decision has been reached at arbitration, there are very limited options to appeal. Due to this, it would be beneficial to both parties to try to reach an agreement before reaching this step in the process.
How this effects local authorities
The Corporate Insolvency and Governance Act 2022 restrictions have now been lifted and gone back to pre-pandemic operation meaning outstanding debts greater than £750 can be pursued by presenting a winding up petition. But with the introduction of the Commercial Rent (Coronavirus) Act 2022, Local Authorities are unable to include any rent arrears in their petitions, and they also cannot pursue a company for unpaid rates whilst engaging in the arbitration process at the same time.
You can read this article and more in IRRV Insights, which is a magazine from the Institute of Revenues Rating and Valuation. Find out more here.
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