Rush To The Courts For Property To Collect £7B In Unpaid Rent As Arbitration Process Becomes Clearer
It is commercial property’s £7B question: What happens to the rent that has gone unpaid during the coronavirus pandemic? The High Court says one thing, the government something else, and swathes of property owners and their tenants remain in the dark about an issue that could decide their fates.
A series of High Court rulings in recent months have come down in favour of landlords, ordering tenants to cough up unpaid rent for periods when they were forced to shut. That has caused a spike in claims from property owners trying to recoup what they feel they are owed, according to property litigation lawyers.
They are moving fast because lurking on the horizon is a force that could block them. The UK government has said it will introduce new legislation before March to force landlords and tenants to come to agreement about how to deal with unpaid rent from the pandemic period or face a decision from an independent arbitrator, an unprecedented situation in UK property law.
The details of that arbitration are starting to become clearer and suggest there will be plenty of rows to come since if the two sides haven’t found an agreement by now, negotiations are likely to become highly acrimonious.
The amount of commercial rent currently outstanding from the pandemic stands at £7B, according to data from technology firm Remit Consulting, which gathers information on 125,000 commercial leases across 31,000 properties in the UK. That is the amount owed even after landlords and tenants have reached agreements to write off some back rent tenants can’t afford to pay.
In many cases, landlords and tenants have reached an agreement on how to deal with rent arrears. Landlords might have written off some rent and agreed for the remainder to be added to rent bills over a prolonged period in exchange for tenants extending their lease by a few years, for instance.
But in some situations — £7B worth, according to Remit’s data — there has been deadlock. A moratorium on commercial evictions and statutory demands for payment, put in place at the start of the pandemic, meant landlords haven’t been able to evict tenants for not paying rent, a measure put in place by the government to help them see out lockdowns and protect jobs.
But landlords have been able to bring cases against tenants in the High Court. The decisions on those cases are starting to come in, and the three issued so far have all been in the favour of landlords.
The owners of the Westfield London shopping centre, the owner of the Trocadeo building near Leicester Square and the owner of another building leased to a cinema chain have all won judgments that tenants need to make back rent payment even though their units were forced to shut by government decree during the pandemic.
That has caused other property owners to try to get similar judgments in their favour.
“The court is seeing a lot of claims right now,” Maples Teesdale partner Rosalind Cullis said. “For landlords, there’s a window of opportunity before the new legislation comes in and it makes complete sense for them. They've seen that in these other cases, there’s been a summary judgment in favour of the landlord, and, in situations where they haven’t been able to reach an agreement with the tenant, some are trying to quickly issue court proceedings.”
Cullis describes this as a window of opportunity for property owners that want to use the courts because the government will soon introduce new legislation to deal with the issue of unpaid rent from the pandemic. The expectation is that by the end of this month or early next month, a new code of conduct for how landlords and tenants should deal with the issue will be unveiled and this code will form the basis of the new legislation.
Rent that wasn’t paid during the pandemic will be ring-fenced, and landlords and tenants will need to try and find a consensual solution about how much should be paid and when. If they can’t, an independent arbitrator will decide the matter and impose a solution. The legislation is set to come into law before the end of next March when the ban on evictions and winding-up orders ends.
As Cullis points out, if landlords think the courts will provide them with a better result than an arbitrator, they are acting now. Tenants, on the other hand, have an incentive to draw out negotiations, with the three cases already decided sending a message that they won’t get a result out of the courts, although one of those cases is headed to an appeal.
The concept of arbitration in contractual disputes over rent has never been seen before in UK law, and landlords and tenants have been awaiting with interest how it will work in practice. Some preliminary details are starting to emerge.
If a dispute does go to arbitration, it's expected the burden of proof will fall on tenants to demonstrate that they can’t afford to pay their full rent, British Property Federation Chief Executive Melanie Leech said. If the arbitrator decides a tenant can’t afford to pay back in full the rent arrears, they will then need to decide if the landlord can afford to provide them with a concession. If the tenant can’t afford to pay in full and the landlord can’t afford to give a concession, it is back to square one to some extent.
To keep it simple, only payments during the period from March 2020 to April 2021, when the UK was pretty much in lockdown and property closures were common, will be open to potential arbitration. Beyond that, however, deciding if a tenant can afford to pay will be incredibly complicated.
“We think that arbitrators will need financial accountancy skills rather than any specific property knowledge,” Leech said. “They will need to look at things like, did the company take government coronavirus support, have they been paying dividends to their owners, are they now taking on new premises or new staff to decide if they can afford to pay their debts. And if they can, it shouldn’t fall on the landlord to pay their debts for them [in the form of rent concessions] because that is people’s pension money.”
Leech pointed out that the complexity of some corporate structures will make it incredibly tricky to unpick which tenants can and can’t afford to pay., Retail and restaurant chains, for instance, are often owned by vehicles that have no cash holdings on their balance sheet and are, in turn, owned by large, wealthy private equity firms or sovereign wealth funds.
The British Property Federation estimates that between a quarter and a third of the £7B is owed by tenants who could afford to pay rent, but are choosing not to, companies they say that carried on trading during the pandemic or those with cash reserves that are simply choosing not to pay. If that figure is accurate, that is about £2B in rent that landlords are missing out on from tenants that could pay.
The point of the system, Leech said, is to make sure that arbitration is a last resort. Neither side will want to have a solution imposed on them so there will be an incentive for landlords and tenants to negotiate before it gets to that stage.
But £7B of unpaid rent despite 18 months of negotiation suggests there will be plenty of complex, messy cases where arbitrators will be asked to pick through who has to pay what.