With the government announcing a fresh extension of the moratorium, Peter Bourke and Dellah Gilbert sift through the detail and compare this with the views of Property Litigation Association members in the earlier consultation process.
On 16 June, the government announced proposals to address the problems faced by landlords and tenants as a result of Covid-19. As well as an extension of the moratorium, there are worrying signs that the government is considering interfering with private contracts via binding arbitration.
Steve Barclay, chief secretary to the Treasury, included the following statement in his announcement to the House:
“As a result of [the] call for evidence, the government now plans to introduce legislation to support the orderly resolution of debts that have resulted from Covid-19 business closures. We will introduce legislation in this parliamentary session to establish a backstop so that where commercial negotiations between tenants and landlords are not successful, tenants and landlords go into binding arbitration. Until that legislation is on the statute book, existing measures will remain in place, including extending the current moratorium to protect commercial tenants from eviction to 25 March 2022.”
When the government issued its call for evidence on commercial rents and Covid-19, it had suggested six different options. The Property Litigation Association canvassed its 1,400-strong membership on these options, none of which included arbitration.
Although property lawyers were divided on the detail of next steps, they favoured ring-fencing Covid arrears, distinguishing between rent arrears accrued during Covid trading restrictions and obligations once the moratorium ends. This appears to be the approach the government will adopt, along with a mechanism that reduces rent obligations if certain criteria are met.
Most respondents to the PLA’s survey also agreed that the government’s code of practice was ineffective and that there has been more than adequate time for negotiations during the pandemic. There was a general feeling that it was time to move forward, but the latest announcement was not the outcome that was expected.
Option 1: all restrictions lifted
This is now not going to happen until at least March 2022.
Option 2: reinstatement of forfeiture but continued CRAR and insolvency restrictions
The indications are that this option will not be pursued. Like forfeiture, the commercial rent arrears recovery restrictions will remain in force until March 2022, although the insolvency restrictions have, for now, only been extended to 30 September 2021.
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, towards 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 government statement indicates there will be targeted measures, but aimed at removal of some rent obligations.
Option 4: mediation
This option appears to have been dropped by the government.
Options 5 & 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. The government’s latest proposal is that there should be a binding arbitration process, which is more formal and expensive than adjudication but has similarly limited rights of appeal.
While an arbitrator has to follow the wording of the lease – and thus current rents would be ordered to be paid – it is clear that the government is looking at changing the law and empowering arbitrators to impose terms on parties retrospectively, the likes of which have not been seen before.
Barclay cited the Australian model as one to follow. If this is the case, landlords can expect to be forced to accept less rent, via waivers and deferrals of up to 100%, where the tenant meets certain criteria, such as a reduction in turnover, and possibly give rebates on rents already paid by tenants and on which the landlord has accounted for tax.
The reference to the Australian model is a cause for concern. Not only are there major differences of policy approach between the UK and Australia, with different business support schemes, but also Australia introduced its National Cabinet Mandatory Code of Conduct on 3 April 2020 with prospective force. The UK is looking at dealing with matters retrospectively, with all the additional complications that will create.
This approach interferes with private contracts and has major implications for landlords, many of whom are highly geared. Hopefully, the government will carefully think through all the ramifications of retrospectively making these changes.
An unpopular solution
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 the clear view of PLA members was that changing private contracts was not a good option. Nevertheless, the indication from Barclay is that the government is going to make significant changes to the law well beyond what most in the industry thought would happen.
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
