Last year was like no other, and the effects of the pandemic on the UK's commercial property sector – and many others – have been profound.
Office staff worked from home in their millions, while many shops, pubs and restaurants spent large chunks of the year closed and the remaining time subject to unprecedented restrictions. Other venues such as nightclubs have not been able to open their doors at all since the UK's first national lockdown in March.
To stem the tide of anticipated insolvencies, the UK government passed the Coronavirus Act 2020 in March, imposing a moratorium on the forfeiture of commercial leases for non-payment of rent. As things stand this moratorium is due to last until 31 March 2021, by which time protective measures – including the prohibition of winding-up petitions under the Corporate Insolvency and Governance Act 2020 – will have been in place for a full year.
When the moratorium expires, it could trigger a tsunami of landlord and tenant litigation over unpaid rents and other unfulfilled obligations. Recognising this risk the government published a voluntary Code of Practice in June, designed to encourage landlords and tenants to work together "to find temporary, and where possible sustainable, arrangements outside of the existing letter of their leases in order to create a shared recovery plan". The government is expected to publish further guidance to support such work in the near future.
"When the moratorium expires it could trigger a tsunami of landlord and tenant litigation over unpaid rents"
However, landlords and tenants are both under significant financial pressure as a result of the pandemic, whether because of loss of trading income or a material shortfall in rents received. As a result discussions between them can be fraught with difficulty, and consequently many leases remain in place without temporary concessionary arrangements as the moratorium nears expiry.
CRIES for help
To better support such discussions and avoid litigation where possible, RICS has set up the COVID-19 Commercial Rental Independent Evaluation Service (CRIES), a mediation service tailored specifically to the new Code of Practice and the particular circumstances of the pandemic.
CRIES provides a "safe space" for tenants to articulate their difficulties and have these recognised by their landlords, while dealing with the latter's need for a rigorous process that will distinguish tenants who genuinely cannot pay from those who may have been using the crisis as an excuse for not doing so.
In practical terms, CRIES allows for clear, balanced dialogue between a landlord and tenant, supported by an experienced, specialist and neutral commercial property expert in the role of an evaluator.
Through discussions, the evaluator will analyse the tenant's grounds for non-payment and the landlord's prerequisites for making concessions and provide this analysis to both sides. The process gives both sides an opportunity to scrutinise proposals and the documentation on which they are based.
Evaluators help maintain a balance between the parties in their negotiations and finds common ground, ensuring the final decision on how to proceed is kept within their control and made on a properly informed basis, taking the impact of the pandemic into account.
Why evaluation is effective
With the moratorium's expiry in mind, considering CRIES as an option has clear benefits for landlords and tenant.
- First, the backlog in the courts resulting from the pandemic means that, where a landlord issues forfeiture proceedings, there is likely to be a material delay in these being resolved.
- Second, the courts may be more than ever minded to grant relief from forfeiture where payment plans can be agreed, given the recent upheaval.
- Third, the courts will expect parties to have tried to reach an agreement before any hearing.
- Finally, where a landlord does forfeit the lease, the market conditions may mean that re-letting is difficult, particularly at pre-pandemic rents. While there will still be numerous cases where forfeiture or a winding-up petition is appropriate, CRIES can be useful where the long-term relationship between the parties can be salvaged as the economy recovers, and also saves costs and time.
Why CRIES?
- The government's code encourages parties to avoid litigation.
- Landlords and tenants are encouraged to meet the challenge of negotiating temporary, or even sustainable arrangements.
- CRIES can help landlord and tenants to achieve agreed outcomes that sustain their relationships and will ensure the future of the high street.