The Government needs to protect SMEs – nobody can be left behind

Action to stem the COVID 19 pandemic losses has hit the UK’s SMEs hard with many now facing a mountain of debt including Bounce Back Loan Scheme (BBLS) , Coronavirus Business Interruption Loan Scheme (CBILS ) and VAT deferment.

Whilst a slow and precarious recovery is now in sight, businesses are struggling to make profit whilst facing unprecedented levels of debt repayment and there are significant fears that good businesses will fall without further support.

Peter Bell, CEO, The Commercial Tenants Association explains that high among the threats to SME survival are accumulated commercial rental arrears. With the Government currently consulting landlords and tenants for a binding arbitration solution for rental debt, The Commercial Tenants Association (the CTA) believes there is much it can do to protect SME tenants.

In an open letter to Robert Jenrick, Secretary of State for Housing, Communities and Local Government, the CTA has outlined a framework to ensure that all businesses are considered and included in the pending arbitration process. The aim being to fairly protect the interests of both landlords and tenants so that all parties benefit from a clear and workable solution to the £7bn rental arrears issue.

Eligibility

Firstly, the Government needs to define clearly who should be eligible to for inclusion in the binding arbitration scheme. The CTA insists that ‘eligible businesses’ should mean all commercial tenants impacted by a significant reduction in turnover suffered by trading restrictions caused by the pandemic, not just businesses directly affected by enforced or voluntary closures such as those operating in retail, hospitality, leisure, tourism and aviation. This ensures consistency with the eviction moratorium, which offered protection to all commercial tenants.

Prescribed period and action

It is essential that the period of rental arrears accumulated due to the pandemic response measures are prescribed and the debt accumulated in this period ringfenced for consideration for prospective arbitration. This prescribed period should be no earlier than 23rd March 2020, when lockdown was first imposed, with end dates set dependent on the period of reduced turnover impact for the business in question; but logically no later than the date of submission to the arbitrator.

Negotiation mechanism

Guidance should be published, without delay, by way of an updated Code of Practice for landlord and tenant relationships as to how negotiations should be conducted, and we recommend the following framework:

It is important that either party to an affected lease may make a written request to the other party to negotiate the lease obligations, including the rent payable. Once this request has been made, the parties must, as soon as practicable, exchange information that is true, accurate and must not mislead. This information must be sufficiently comprehensive to allow for the parties to fairly negotiate in a completely transparent manner. At a minimum this information should include a statement setting out clearly the terms to be negotiated; provide supporting information and evidence of turnover reduction; and the steps taken by the tenant to mitigate their losses caused by the COVID-19 pandemic.

Rental relief

We suggest that within 21 days after submission, the landlord must offer the tenant rent relief along with any other proposed changes to the lease terms. The parties must then negotiate in good faith with a view to agreeing the rental relief to apply during the prescribed period, including any arrears of rent or other sums due under the lease.

We suggest a suite of rent relief measures of up to 100% of the rent comprising waivers, reductions, remissions or deferrals or a combination of them be made available. Currently in the UK, no rent waivers have been mandated by the government in its pandemic measures to support business. Given the plight of many tenants no less than 50% of the rental relief should be offered by the landlord in the form of a waiver. Logically, all relief measures should apply for the duration of the prescribed period. The tenant then should have 21 days in which to accept the landlord’s offer of rent relief. It is essential that both parties have recourse to arbitration if agreement cannot be reached and that any award by the arbitrator will be final and binding.

Arbitration

We believe that final recourse to a fair arbitration process is key to a workable solution to the pandemic rent arrears crisis. Ultimately arbitration should be the last resort as a revised and more robust (statutory) Code of Practice should result in more cases being settled by negotiation. Arbitration will be inevitable for certain, more complex cases and arbitrators should be from a pool of individuals with the necessary professional expertise, typically taken from the fields of chartered and management accountancy. Arbitrators using the principles set out in the Code of Practice for landlord and tenant relationships during the pandemic, as well as an updated Code outlined earlier, should use all the available information submitted during negotiation to make a binding arbitration award. Time is of the essence, business survival and people’s livelihoods are at stake; so the Arbitrator’s award should be published within 28 days of the parties’ submissions.

Interim protection

Whilst this legislation is being formed, we believe commercial landlords should be prevented from taking enforcement action on leasehold debt and other breaches or pursuing other remedies during the prescribed period. This includes actions such as pursuance through the courts the issuance of County Court Judgments (CCJs) which many tenants are currently facing while attempting to recover from the pandemic.

Furthermore, we strongly urge that the moratoria are widened to prevent proceedings to recover leasehold debt in the county courts. This moratoria on enforcement action needs to be extended and applied until a settlement, either by way of negotiation or arbitration has been reached. We acknowledge that these protections should not apply if the tenant has demonstrated that they have substantially failed to comply with the tenant’s rent negotiation obligations under the Code of Practice, despite genuine attempts by the landlord to negotiate the rent payable.

The CTA genuinely hopes that these proposals will assist the government in drafting its legislation and publishing further guidance. We believe this will help all parties reach an agreement on the problem of the huge and accumulating leasehold debt resulting from the pandemic.

It is essential that SMEs, who are the life blood or our cities, town centres, communities and vitally, our economy, are thrown a lifeline through a fair resolution framework for rent arrears.

Many thousands of jobs depend on it and, ultimately, thriving businesses tenants mean better returns for investors.