In the third article in a three-part series on the Commercial Rent (Coronavirus) Bill, Edward Blakeney and Mattie Green examine the accompanying Code of Practice.
This is the final part of our three-part series on the recent proposals by the government to tackle certain commercial rent debts caused by the pandemic. In part 1 we looked at the key definitions in the act and the proposed arbitration scheme; in part 2 we looked at the changes to enforcement and insolvency measures; and now we turn to the new Code of Practice (“the Code”) that has been issued alongside the Bill.
The Ministerial foreword to the Code expressly notes that it “aligns” with the Bill to help explain its provisions and can be used “alongside the published Bill” to negotiate and resolve rent disputes. It therefore has a key practical purpose in and of itself. But what can it reveal of the policy objectives lying behind the Bill? This may well be relevant to any future developments in the Bill (or other legislation relating to pandemic rent debts) and the interpretation of the Bill were parties ever to dispute its provisions.
The Code of Practice and the policy behind the Bill
The scope of the Code is set out in paragraphs 1-3. It applies, as does the Bill, to all commercial leases held by businesses which have built up rent arrears, due to an inability to pay, as a result of the impact of the Covid-19 pandemic. It therefore does not apply to commercial licences, nor to those with debts not caused by Covid. More broadly, the Code is also “relevant” (to use the wording of the Code) for all commercial rent debts, even those falling outside of the Bill, to assist with the terms of negotiations between landlords and tenants as to how best to resolve any rent arrears.
The Code of Practice generally seeks to explain the Bill and in particular the proposed arbitration scheme and how it is intended to work. This has been covered in the earlier parts in this series. But the explanations also demonstrate the motivations and policy behind the Bill.
The purpose is stated clearly almost right from the outset:
“the government’s intention is that, where possible, rent debt accrued as a result of the COVID-19 pandemic should not force an otherwise viable business to cease operating. Contractual commitments should be recognised as far as possible while achieving a proportionate balance between the interests of landlords and tenants.”
The press release puts matters even more starkly – if a tenant is unable to pay rent, they should negotiate with the landlord “in the expectation that the landlord waives some or all of the rent arrears where they are able to do so.”
This is clarified and (to some degree) tempered by the three principles said to govern considerations by landlords and tenants of rent owed as a result of premises having been closed or because it was not deemed viable to remain open (albeit in the latter case the arrears would fall outside the Bill):
The aim is to preserve viable businesses;
- The preservation of the viability of the business of the tenant should not be at the expense of the solvency of the landlord; and
- Where it is affordable for a tenant to meet their obligations under the lease in full, they should do so without delay; any relief should be no greater than necessary for the tenant business to afford the payment.
- There is, therefore, a balance to be struck. It is not simply a case of a tenant walking away from its debts at the expense of the landlord.
This is reiterated by the requirements for evidence. And so:
- Where a viable tenant is seeking to deviate from the terms of the lease in respect of rent owed, they will need to demonstrate why the payment is unaffordable and what payment or payment period might otherwise be affordable in the near future. That may include information about their assets and liabilities, impact of COVID-19 on their business, and other information about their financial position and expenditure. Types of evidence that could be used are listed in Annex B to the Code.
- A landlord can also evidence what is affordable to them, for example that a proposed reduction in rent demonstrates a threat to their solvency.
What happens when a tenant’s business would not be viable without rent relief, but the relief requested poses a real risk that the landlord will be pushed into insolvency? In those circumstances, the position of the tenant does not trump that of the landlord – instead, the landlord would be expected to consider whether a proportionate reduction in rent is appropriate. Again, the notion is on the appropriate balance to be struck.
Some may say that the mere fact that landlords are being required to give up any of their rent is an unfair result. Why should the government introduce legislation that is affecting private commercial relationships across the country?
An answer seems to be provided by the Code: “It is in the interests of both landlords and tenants to do everything reasonable to enable otherwise viable … businesses to continue operating through this period of recovery. As such, we encourage landlords and tenants to negotiate regardless of whether accrued rental debts fall within scope of the Bill.”
Furthermore, the Code recognises that a number of businesses fall outside the Bill but were nevertheless impacted by Covid. In those cases the government “strongly support landlords and tenants coming together to use the principles and methods set out in this code to negotiate and come to an agreement on outstanding rent arrears that protect the viability of the business, thus benefitting the landlord and the wider economy.”
And again, one of the ‘Behaviours to be exhibited by landlord & tenant’ is “transparency and collaboration: we (landlord and tenant) have a mutual interest in business continuity that reaches far beyond the extent of this pandemic. We are economic partners, not opponents.”
The core idea of viable businesses not just being a benefit to the tenants themselves, but to landlords and the ‘wider economy’ as well, is therefore made again. Such an idea also appears to mirror the approach the Courts have taken when considering CVAs – see for example Lazari Properties 2 Ltd & Ors v New Look Retailers Ltd & Ors  EWHC 1209 (Ch).And so, whilst a landlord may take a hit in waiving its entitlement to arrears of rent, that is seen to be in the interests of the economy generally.
Although this may explain the reasoning behind the Bill, and reasoning we can expect to see taken forward, it still leaves a key question for those that fall outside of its scope – whilst landlords may be expected to comply with the Bill’s ‘spirit’, what is the consequence if they refuse to do so? There does not seem to be any specific sanction imposed by the Bill, and thus it may be that those who fall outside the scope of the Bill are left out in the cold.
Further clarification of the Bill
Further points of clarity of the Bill provided by the Code are noteworthy.
First, the Code expressly states that premises that were not forced to close during Covid are not within the scope of the Bill. This we knew, but the useful point is that Annex A to the Code summarises ringfenced periods and the business affected in a useful table – practitioners will want to have this to hand.
Second, and unsurprisingly, the importance and primacy of the arbitration scheme is emphasised with the confirmation that the parties would not be prevented from applying for statutory arbitration (even if ADR was mandatory under the lease).
There are also two points of note as to how arbitration is to work in practice:
- Part 1 of our series mentioned that arbitrators were to disregard anything done by landlord or tenant with a view to manipulating their financial affairs to improve their position in the arbitration process. An example given in the Code is the payment of excessive dividends. This, no doubt, is to counter the unpopular position where a business claims relief but the shareholders nevertheless enjoy the substantial pay-outs.
- Further guidance to assist arbitrators, alongside more specific guidance for landlords and tenants on the details set out in the Bill, will be published once the Bill has passed through parliament. Watch this space. The principle, however, seems to be that the arbitration process should be simple.
Finally, and perhaps of some comfort to landlords is also the recognition of the fact that following the replacement of the current protections with the new arbitration legislation and provided that such action is not in scope of the binding arbitration process, landlords will be able to exercise their ordinary enforcement rights in the ways they did prior to the moratorium. This is notable given that the protected rent debts under the Bill are narrower than those under the Corporate Insolvency and Governance Act 2020. The Code expressly notes that action could be taken in respect of:
- Non-payment of rental arrears incurred prior to March 2020 and from the end of the ringfenced period onwards
- Tenants that fall outside the scope of arbitration legislation over the non-payment of rental arrears accrued at any time
- Charging interest on rent liabilities incurred from the end of the ringfenced period onwards, if such interest payments are included in the terms of the lease
That second example in particular seems contrary to the notion that even in cases falling outside the scope of the Bill, the spirit of the Bill should be applied. This reinforces the point made above about the lack of sanctions for non-compliance. Although the Code also notes that the government expects lenders to demonstrate forbearance to their borrowers during the period in which arbitration is in effect, there is a similar issue of limited means to enforce compliance.
And so we come to an end of our series on the Bill and Code. As the legislation passes through parliament there may well be changes made, which will require consideration in their own right.
However, we hope that the series has been of help. It certainly seems that substantial change is on the horizon, which is seen by the government as the best (or perhaps the least worst) way through a challenging issue following a few challenging years caused by Covid-19.