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Covid-19 and commercial rent arrears disputes – the picture so far

Covid-19 and commercial rent arrears disputes – the picture so far

Landlords of office premises can take some comfort from the first known arbitration under the lockdown regulations of the Commercial Rent (Coronavirus) Act 2022.

The arbitrator decided that a tenant which kept an office open with just two workers on site, lost its protection to protected rent debt under Covid-19 rules, even though it was forced to close its 300 retail stores at the same time.

As a result, Signet Trading Ltd – the company behind the H Samuel and Ernest Jones jewellery brands – has had to pay landlords, First Property Group, £450,000, the total rent it withheld during pandemic restrictions.

What rent debts are protected under Covid arrears legislation?

Under Section 4 of the Commercial Rent (Coronavirus) Act 2022, which received royal assent in March, ‘protected rent debt’ is defined as a debt under a business tenancy where the tenancy was ‘adversely affected by coronavirus’.

The aim is to provide a mechanism for the assessment and relief of certain rent debts through a binding arbitration system aimed at resolving disputes where landlords and tenants have not been able to agree a way forward.

Why did this fail to meet the criteria for ‘protected rent debt’?

Signet argued that its offices fell under the closure requirements imposed by the government’s mandated lockdown rules and was therefore subject to the same exemptions as its retail portfolio, which was forced to shut during the pandemic.

First Property, on the other hand, maintained that the office was never required to close because it was not used for the purpose of offering goods for sale.

The arbitrator, at preliminary stage, agreed as the government rules did not, at any time, impose closure on office accommodation.

Therefore, he decided, the tenancy was not adversely affected by coronavirus under the Act with no protected rent debt which could form the basis of arbitration.

First Group’s Martin Pryce said: “Too many businesses tried to use the cover of Covid-19 to avoid paying rent that was rightfully due. Landlords should not have to pay for this.”

What are the implications of this rent arrears decision for landlords of office premises?

It’s basically good news for two main reasons:

  • It provides some clarity and confidence for landlords that when a mutually agreeable solution with a tenant can’t be reached in advance, the arbitration process is operating in line with the provision set out in the Act;
  • If Signet had been successful, it could have created a disparity between office tenancies with a wider business in retail or hospitality being eligible for relief whilst businesses operating in other sectors but not forced to close despite being adversely affected, remaining ineligible.

Also, as the decision came after the arbitrator scrutinised the case at an early stage, it demonstrates that by considering eligibility under the Act at an early stage, both sides of the dispute can be saved the cost of a full arbitration.

When is the deadline for referrals under the act?

The current deadline was 23 September 2022 for making a referral to arbitration under the Act.

The arbitration process has been little used so far and way below the government’s projected figure of 7,500 cases, probably because most landlords prefer a negotiated commercial solution.

Get in touch

If you would like to know more about the arbitration system or would like advice on what to do next to find a solution, please contact Wards Solicitors’ highly experienced Commercial Property Disputes team.

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