Retail tenants who mistake covid rent ‘breather’ for free occupation could pay the price

As a result of government support and the general hardship brought by the Covid pandemic, many fashion tenants allowed themselves to fall into rent arrears. Very large numbers remain in that position some two years down the line.

With government protections set to come to an end next month having been in place for two years, this might be a big problem for defaulting tenants who fail to recognise the change in the legal landscape, and don’t take steps to address it.

How did we get here?

In March 2020, fashion tenants who operated out of bricks and mortar real estate were thrown a lifeline by the government: if they found themselves unable to pay the rent under their leases, legislation (in the form of the Coronavirus Act 2020) kicked in and prevented landlords from going to Court to recover rent arrears or from taking back possession of the leased property by forfeiture.

However, the Treasury estimates that by March 2022, the amount of unpaid commercial rent arrears could reach £9 billion. Its data also suggests that fashion retailers are amongst the categories of tenants who owe the most!

So what’s happening now?

Rent arrears of £9 billion is not the sort of money landlords will want to write off. Worse still for those fashion tenants who remain in arrears, the protection from landlords taking legal action ends on 25 March 2022.

As a result the government is bringing in new legislation to replace the suspension which will mean compulsory arbitration for certain covid-related rent arrears. However, the bad news is that it is envisaged that such legislation will only relate to:

• rent arrears incurred in the specific periods of enforced government closures in 2020 and 2021; and

• are likely to be sector-based.

Any other arrears from outside those periods will remain due and payable, and the moratorium which has muzzled landlords for the last two years will no longer be there to protect tenants.

This means that landlords will once again have all the legal tools previously available to them under their leases to pursue unpaid rent and remedy other breaches. Further they might not be in the mood to negotiate!

This could lead to landlords commencing court proceedings to pursue all unprotected historic arrears, or even changing the locks on the property and simply taking back possession without a court order – known as ‘forfeiture by peaceable re-entry’ with little warning.

For arrears which did not fall due during forced Government closures in 2020 and 2021 (and therefore are likely to fall outside the remit of the new legislation), tenants need to remember that what they have benefited from has been a temporary suspension of landlord’s rights – not a rent-free period.

It has not stopped rent arrears from accruing in the meantime, and it will not stop landlords from pursuing historic arrears insofar as they are not caught within the new scheme. If the Government figures, and the testimony of real estate professionals up and down the country is correct, the level of rent arrears relating to periods outside of forced Government closures is still likely to be a big number.

Good news for tenants

There is, however, one piece of good news for tenants, which is that the new legislation will require landlords to allocate any sums paid by the tenant to ‘unprotected’ arrears first where the tenant has arrears which fell due both during and outside of the protected periods. This means that if tenants are able to pay off some of the arrears, they will automatically apply to the arrears outside of the new scheme.

Pop-ups

Obviously, fashion retail does not exist solely in the context of a traditional leasehold structure. Pop-ups are ubiquitous in big cities and further afield, since they offer short term deals for business, at potentially less onerous terms than on a long-term commercial lease.

Whilst pop-up fashion retail can certainly be a less risky way of getting a presence on the high street, it needs to be born in mind that because a pop-up is usually done on a licence (as opposed to a traditional lease) it is excluded from the existing protection for tenants under the legislation in the first place.

Even a lease arrangement is not protected if it is for less than six months, as pop-up arrangements invariably are. In such cases, a well-advised landlord / licensor would be aware that there is no bar on taking steps to end a licence arrangement or a short-term lease, and that it had the right to pursue all outstanding arrears. The change in the law will not affect that right. Pop-ups, then, are already exposed if they fall behind with the rent.

Take home points

• Fashion tenants who have been unscrupulous with rent payments, and even those who have genuinely struggled to stay afloat during the pandemic must avoid sleepwalking into the end of the moratorium.

• If they have accumulated rent arrears which are not directly related to specific periods of forced Government closure, they should take stock of their arrears position, and seek legal advice on their specific circumstances in advance of 25 March 2022.

• If they do not do so, there is a risk that all historic arrears they may have accrued during the pandemic could come sharply back into rather unwelcome focus.