A new lease of life: what lies ahead for landlords and tenants

Over the last year, we’ve continued to witness a major structural change in UK commercial leasing. Flexible office providers remain popular, and we’re seeing more and more traditional landlords coming to terms with the fact that tenants require increasingly flexible leasing terms. Built in flexibility via tenant break rights is in favour and, in the retail space, landlords and tenants are looking more and more towards turnover rents as a means of creating a more balanced approach to rental liability. Pandemic clauses are becoming increasingly commonplace too, a clear signal that tenants are taking a conservative approach to risk in their lease negotiations – and given that insurance is not currently available in the market to cover pandemic related loss of rent, such clauses are introduced at the landlord’s cost.

2020 was an unprecedented year in terms of change in the leasing landscape, but 2021 has had its fair share of Government announcements too – notably, the moratorium on forfeiture for non-payment of rent was extended until March 2022 alongside restrictions on landlords’ ability to petition for a company to be wound up based on non-payment of rent.  In November 2021, the Government laid the groundwork for the much-talked about ring-fencing legislation by introducing a draft Bill into Parliament. The new legislation proposes to help businesses which were forced to close their premises as a result of Covid-19 by creating a ring-fence around arrears which accrued as a result of the pandemic. The ring-fencing rules will be accompanied by a mandatory arbitration regime which will apply in respect of the ring-fenced rent only. Arbitrators will be required to consider financial data provided as evidence and their decisions will be legally binding.

Also on the horizon is the Government’s proposed long-awaited reform of landlord and tenant legislation, including the “outdated” security of tenure legislation. The Government’s focus will be on enabling better collaboration between landlords and tenants and ensuring that the leasing process adequately reflects current economic conditions. On that note, a revised Code of Practice for Commercial Property Relationships was published in November 2021 alongside the Bill introducing the new ring-fencing and binding arbitration regime - the key principles are centred around the parties working together to reach mutually acceptable outcomes where possible, with the main focus this time being on preserving viable businesses (both landlord and tenant) by focussing on affordability. The Code makes it clear that parties should negotiate (adopting the principles of the Code) first and then only use the binding arbitration as a “last resort”.

Over the last year, we saw a swathe of cases brought by landlords against tenants in arrears. Despite tenants raising varying and imaginative arguments as to why the rent should not be payable while their premises were forced to close due to the pandemic, the Court’s tendency has been to uphold the letter of the lease rather than imposing a retrospective rent cesser. This aligns with the Government’s message in its November announcement that contractual obligations should be honoured where possible. In the TFS Stores, Sports Direct / Cineworld / Mecca and Picturehouse Cinemas cases, the Court ordered that the tenant was liable for the full rent during the period in which Covid-19 restrictions were in place. The Court’s view has, to date, been that the voluntary Code of Practice is no barrier to a landlord bringing a claim for unpaid rent - however, the new ring-fencing legislation will, when brought into force, put the boot on the other foot as tenants with ring-fenced arrears will be automatically protected from debt claims in respect of those arrears. The legislation will have retrospective effect meaning it will apply to proceedings brought from the day after the announcement (i.e. from 10 November 2021). If proceedings are brought, tenants will be able to apply for them to be stayed.

The tenant protection measures have now been in place for almost two years – the Government’s latest announcement in November 2021 was a welcome glimmer of certainty as to what the short-term future has in store for landlords and tenants. However, more change is yet to come as the arbitration window is expected to last for only a short period of six months (expected to start from March 2022) and wider-ranging reform of landlord and tenant legislation is also on the horizon. Amidst all of this, it is important that the underlying message in the Government’s latest announcement is not lost – if tenants can afford to pay they should do so, and if not, parties should continue to negotiate and reach agreement where possible. It remains to be seen how frequently parties will have to resort to the arbitration regime. This might mean that, for many commercial landlords, the “new normal” for the landlord and tenant relationship is in fact, for now at least, “more of the same”.