End of the rent moratorium – What you need to know
The rent arrears moratorium was due to expire on the 30th June, but the government has announced it would be extended until 25 March 2022. Both commercial landlords and tenants are encouraged to resolve the rent arrears issue as a partnership.
The rent arrears moratorium was due to expire on the 30th June, but the government announced today it would be extended until 25 March 2022. Both commercial landlords and tenants are encouraged to resolve the rent arrears issue as a partnership, a message shared by the Government from the outset of Covid. We have seen an increased intensity of landlord and tenant discussions as we moved towards 30th June, although there are some parties still not prepared to compromise – but what can be done to encourage successful collaboration?
The potential problem
Despite the pandemic being circa 15 months old, there are still ongoing issues on rent payments and related issues between landlords and tenants across all sectors.
Whilst the Government has previously extended deadlines three times over the past year, it seemed another extension would be unlikely, but a new deadline has been set of 25 March 2022. This may result in parties backtracking on previous discussions.
Parties to act in Good Faith
The Government had been messaging to both landlords and tenants for greater participation, especially as the Government had introduced a new code of practice during the first lockdown last year. Although, compliance is voluntary, it still acts to emphasise a partnership between landlords and tenants and provides that in all dealings with each other in relation to the code and the COVID-19 crisis, both parties will act reasonably, transparently and in good faith.
However, because of the non-mandatory nature of the Government’s code, there is nothing to stop landlords taking court action and the courts awarding in their favour, it is just enforcing that action which is the problem.
Now that the period has been extended there is a temptation for parties to delay discussions which would undermine the Good Faith principle.
Landlords and Tenants acting together
Most landlord’s are being constructive and commercially sensible. There are two bases of generic agreements being:-
- An agreement purely regarding the rent arrears
- An agreement regarding the variation to the lease terms
Rental Arrears Agreement
In our experience, there needs to be a clear understanding in writing whether these agreements offer a write-off, or a period of rental deferment for the arrears, which have been “ring fenced”. If the landlord agrees for a rent write-off, then these amounts or any other rent-free inducements need to be explicitly stated to avoid any misinterpretation.
Similarly, if the landlord is considering a rental deferment, then the time period for repayment or instalments and accrued interest must be outlined in the rent agreement to avoid any misunderstanding. There may be a consideration of both a rent-free period and a rental deferment, which again needs to be explicitly stated in terms of the time period, the repayment or instalments and the accrued interest.
A word of caution should be noted for tenants who have impending lease breaks, as those affected should be completely certain that any rent arrear agreements do not undermine the ability to break the lease mid-term.
Variation to the lease terms
As an alternative to discussing the rental agreement, there may be other ways to vary the lease term in order to achieve a rental reduction or reflect the required rent-free period. The lease negotiations may take longer to conclude, including the legal drafting, but remain a beneficial way for both parties to rebase the original bargain to reflect the market rental changes, especially the pertinent lease requirements of the parties and the level of rent arrears. The desired terms should reflect a reasonable balance between the landlord and tenant.
Mediation
The Royal Institution of Chartered Surveyors (RICS) has set up a mediation panel between landlords and tenants in August 2020 at the request of the Government. To date, there has been limited use between landlords and tenants, partly as the moratorium periods were being extended. There will be greater focus to both landlords and tenants to agree to use the RICS dispute resolution over the coming months.
Landlords instigating the rent arrears action
This would be only appropriate if there was no dialogue between the parties or if those discussions had broken down. The main rent remedies available to landlords after 25th March 2022 would be bailiffs, forfeiture, or statutory demands and winding up orders. These have always been available but, as stated earlier, cannot currently be enforced.
Signs of Landlords increased impatience
There have been two recent cases involving landlords taking court action against tenants for non-payment of rent(s). This is despite knowing that they cannot enforce the judgement against the tenant until the moratorium is lifted. All the judgements arrived at the same conclusion, that the tenant had a contractual liability to pay the rent. The judgements however cannot be enforced yet, but they will be enforceable by 26th March 2022. As a result, one of the affected tenants is now looking at a possible CVA type approach as a result of cash flow implications of the judgement.
It is always better to talk
Both landlords and tenants will be looking at their options, undertaking a scenario analysis of each of the commercial risks of rent recovery, and overlaying a practical market view of the level of rental and letability of the premises. Discussions should be intensified between landlords and tenants to avoid further uncertainty. These discussions could forge a better relationship between a landlord and tenant, giving confidence and resilience to both partners and ensuring the future of bricks and mortar in a fundamentally changing market.
