Commercial landlords who’ve been left with rent arrears as a result of tenants not being able to trade properly during the pandemic still have hurdles to overcome before they can look to recover monies owed.

That’s the view of solicitor Julie Adams of Hay & Kilner Law Firm in Newcastle after a new law came into force which is designed to give businesses that aren’t yet in a position to pay back all their pandemic rent arrears more opportunity to do so.

The Commercial Rent (Coronavirus) Act , which has just received Royal Assent, makes ‘provisions enabling relief from payment of certain rent debts under business tenancies adversely affected by coronavirus to be available through arbitration.’

Landlords and tenants are encouraged to negotiate agreements about how and when rental debts are settled using the Act’s Code of Practice, with a new binding arbitration system in place as a last resort for eligible businesses if they can’t agree.

The remaining government rules brought in two years ago to protect companies in pandemic-related financial distress from creditor action, which included preventing landlords from presenting winding up petitions relating to rent arrears, are to be phased out by 1 April.

This means that landlords can once again take action to recover rent-related debts, although some restrictions still apply as to the sums that can be recovered.

The new law divides such debts into ‘protected’ and ‘unprotected’ sums, with the former having been accrued when tenant businesses were operating under any Covid-related restrictions, such as having to close earlier than usual, limiting the number of customers they would have in their premises or shutting their doors altogether.

Commercial landlords can at this time only take action to recover unprotected debts, with provisions in place to allocate payments made by the tenant to clear unprotected debts first.

Claims in respect of ‘protected sums’ must either be referred to arbitration, otherwise action is again stayed for at least 6 months.

Julie Adams, who is a senior associate in Hay & Kilner’s dispute resolution team, is expecting the full implications of the new law to become clearer as it is applied in practice, and she is urging landlords and tenants to continue to take the collaborative approach that has been widely in evidence through the pandemic.

She says: “Despite often lacking their usual income, landlords have still had their own responsibilities to meet over the last two years, including mortgages, insurances, maintenance costs and utility bills, and they will be understandably keen to recover the money they’re owed.

“However, from the government’s point of view, it makes little sense to have supported businesses for two long years only to leave them on their own at a point where many are still not able to generate the same revenues that they did before the pandemic.

“Many firms adapted their operations during the pandemic to enable them to keep going, but even if they never actually stop trading, any rental debts accrued while they had to close earlier than usual or had to operate below full capacity still counts as ‘protected’ debt and can not be included by landlords in any debt recovery actions they look to bring.

“The government is trying to strike a difficult balance through this new law between landlords’ solvency and tenant businesses’ viability, with the arbitration service designed to impose a way forward that takes both parties’ situations into account.

“The clear hope is that agreements can be reached before things reach this stage, especially as it’s likely to take some considerable time before cases even come before an arbitrator, and a continuing focus on collaboration makes sense from both sides.

“Landlords may find it difficult to replace a tenant in the present economic circumstances, while it makes sense for them to agree to receive what they’re owed over a longer time as their tenant gets back to full speed, rather than pushing too hard to recover their money too quickly and losing out altogether.

“More clarity on the practical impacts of this new law will follow as the first cases are brought and it makes sense for both landlords and tenants to seek expert advice if they’re unsure about the impact of the new rules on their respective situations.”

Hay & Kilner is one of North East England’s leading independent law firms and provides comprehensive legal advice across every aspect of the law to businesses and individuals from both within and outside the region.