The government’s recent announcement, that it intends to introduce a binding arbitration scheme for commercial landlords and tenants dealing with the issue of rent arrears following the COVID-19 crisis, has been seen by many as a blow to landlords.
This promise of arbitration, combined with the existing restrictions on the actions open to landlords, makes it understandable if commercial landlords choose not to take action against their tenants, until the situation is much clearer.
The dates for the end of tenant protections which now apply should be treated as provisional until proved otherwise, but it does seem less likely now that we are due to fall back on the kind of blanket provisions which made the period from March 2020 onward so difficult for tenants and landlords.
Without the government plans to introduce the binding arbitration process, landlords and tenants working together would probably reach a mutually acceptable agreement over arrears.
Problems are most likely to arise when the landlord suspects the tenant is using the protection measures to avoid paying rent that they can afford, or the tenant feels the landlord is being inflexible and unfair in the face of genuine and unavoidable hardship.
The arbitration aims to be quicker and easier than court action, although the details of the scheme and the relevant Code of Practice have yet to be published. In the meantime, tenants able to operate normally should pay their rent as per the terms of their lease, since a period of normal operation will not be covered by any legislation.
Once the restrictions have been lifted, landlords will be able to evict tenants on the basis of rent arrears incurred before March 2020 or after the end of the ring-fenced period.
How arrears will be treated for those businesses which moved in and out of restrictions during the pandemic or those, such as restaurants which turned to deliveries and were able to access alternative sources of income, remains to be seen.
Why wait if action is warranted?
Given the uncertainty, waiting to see what happens is perhaps understandable, but the High Court ruling in the case of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd [2021] EWHC 2591 (Ch) shows what can be achieved now.
In this case the landlords, London Trocadero, brought a claim against the current tenant, the original tenant and a guarantor for £2.9m in unpaid rent and service charge on a cinema. As with other recent similar cases, the tenants defence centred on the unforeseeable, unprecedented nature of the pandemic and its impact on the interpretation of any lease.
The defence put forward by the tenants can be roughly broken down as follows:
Revised terms should be implied into the leases, stating that the payment of rent and service charges would be suspended during a period in which the use of the premises as a cinema was illegal and/or during those periods when attendance at the cinema was less than could have been anticipated by the parties.
The Court rejected this defence on the basis that such implied terms were not needed for the lease to function effectively, and nor were they so obviously proper as to ‘go without saying’. The lease did include rent suspension in specific circumstances, which showed that the parties had considered the issue but still not included a warranty based around the legality of the use of the premises.
The judgement of the Court offers an overview of case law in this area, before ultimately finding that the use of the premises as a cinema was not ‘fundamental to the basis’ on which the parties entered into the lease and for rents to be paid.
Finding for the landlord, demonstrates that COVID notwithstanding, the Courts are still highly likely to find on behalf of any landlord pursuing rent arrears and tenants would be advised to negotiate an affordable resolution, rather than relying on the impact of COVID as a defence.
From the landlords perspective, negotiating a settlement is almost always going to be preferable to having to undertake court action with the uncertainty this always introduces, despite the positive outcome in this case, although the prospect of such action, in light of the case may help the Landlord in those negotiations.
If you have arrears to pursue as a landlord or as a tenant you need advice to help you negotiate a resolution agreeable to both parties, please get in touch with James Khakpour-Smith, a Commercial Real Estate Partner in the St Albans Office of Taylor Walton. You can reach him on 01727 845245 or email james.khakpour-smith@taylorwalton.co.uk