Dealing with the impact of Covid-19 in the commercial property sector
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This article was authored by Jamie Mangan, real estate litigation senior associate at Fieldfisher and Martin Burns, Head of ADR Research and Development at the RICS.
2020 has been a year like no other due to the Covid-19 pandemic, and the effects on the commercial property sector (as with many other sectors) have been profound.
Office staff have worked from home in their millions while many shops, pubs and restaurants have 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 lockdown took effect in March.
To stem the tide of anticipated insolvencies, the UK government passed the Coronavirus Act in March 2020, imposing a moratorium on the forfeiture of commercial leases for non-payment of rent, which – at the time of writing – has been extended until 31 March 2021.
This extension means that the protective measures (also including the prohibition of the presentation of winding-up petitions set out in the Corporate Insolvency and Governance Act 2020) will have been in place for a full year.
The government has confirmed that at the end of this extended period, the moratorium will expire. This expiry could trigger a tsunami of landlord and tenant litigation over unpaid rents and other obligations that have not been complied with, during the pandemic.
Recognising this risk, the government published a voluntary Code of Practice in June, designed to encourage landlords and tenants to work together and "to find temporary, and where possible sustainable, arrangements outside of the existing letter of their leases in order to create a shared recovery plan".
Further guidance to support such negotiations is expected to be published by the government in the near future.
However, both landlords and tenants are under significant financial pressure as a result of the pandemic, whether due to loss of trading income or a material shortfall in rents received.
As a result, such discussions can be fraught with difficulty, with the result that many leases remain in place without temporary concessionary arrangements as we move towards the expiry of the moratorium.
CRIES for help
To better facilitate such discussions, and avoid litigation as far as is possible, the RICS set up the Covid-19 Commercial Rental Independent Evaluation Service (CRIES) – a mediation service tailored specifically to the Code of Practice and to the particular circumstances of Covid-19.
CRIES can provide a ‘safe space’ for tenants to articulate their difficulties and have these recognised by their landlords, while addressing landlords' need for a rigorous process that will separate 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 creates the opportunity for clear, balanced dialogue between a landlord and tenant that is facilitated by an experienced, specialist and neutral commercial property expert in the role of an evaluator.
The evaluator will develop, through discussions, an incisive analysis of the tenant’s grounds for non-payment and the landlord’s prerequisites for making concessions. The process gives both sides an opportunity to scrutinise proposals and the documentation on which they are based.
The evaluator helps maintain a balance between the parties in their negotiations, finds common ground where it exists and ensures the final decision on how to proceed is kept within their control and is made on a properly informed basis, taking into account the impact of the pandemic.
The benefits of appointing an evaluator
There are clear benefits to landlords and tenants in considering CRIES as an option in anticipation of and following the expiry of the moratorium.
First, the backlog in the courts, which has occurred as a result of the pandemic, means that where a landlord issues forfeiture proceedings there is likely to be a material delay in those proceedings being resolved.
Second, more than ever the courts may be 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 accommodation prior to any hearing.
Finally, where a landlord does forfeit the lease, the conditions in the market 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 an appropriate course of action, CRIES can be a useful solution for cases where the long-term relationship between the parties can be salvaged as the economy recovers, with the added benefit of saving costs and time.
Bringing in a third-party evaluator, who can facilitate and structure discussions between the parties, and help each of them to understand the position of the other, can lead to mutually beneficial solutions being achieved.
The service addresses a problem that cries out for a pragmatic approach.
Office staff have worked from home in their millions while many shops, pubs and restaurants have 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 lockdown took effect in March.
To stem the tide of anticipated insolvencies, the UK government passed the Coronavirus Act in March 2020, imposing a moratorium on the forfeiture of commercial leases for non-payment of rent, which – at the time of writing – has been extended until 31 March 2021.
This extension means that the protective measures (also including the prohibition of the presentation of winding-up petitions set out in the Corporate Insolvency and Governance Act 2020) will have been in place for a full year.
The government has confirmed that at the end of this extended period, the moratorium will expire. This expiry could trigger a tsunami of landlord and tenant litigation over unpaid rents and other obligations that have not been complied with, during the pandemic.
Recognising this risk, the government published a voluntary Code of Practice in June, designed to encourage landlords and tenants to work together and "to find temporary, and where possible sustainable, arrangements outside of the existing letter of their leases in order to create a shared recovery plan".
Further guidance to support such negotiations is expected to be published by the government in the near future.
However, both landlords and tenants are under significant financial pressure as a result of the pandemic, whether due to loss of trading income or a material shortfall in rents received.
As a result, such discussions can be fraught with difficulty, with the result that many leases remain in place without temporary concessionary arrangements as we move towards the expiry of the moratorium.
CRIES for help
To better facilitate such discussions, and avoid litigation as far as is possible, the RICS set up the Covid-19 Commercial Rental Independent Evaluation Service (CRIES) – a mediation service tailored specifically to the Code of Practice and to the particular circumstances of Covid-19.
CRIES can provide a ‘safe space’ for tenants to articulate their difficulties and have these recognised by their landlords, while addressing landlords' need for a rigorous process that will separate 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 creates the opportunity for clear, balanced dialogue between a landlord and tenant that is facilitated by an experienced, specialist and neutral commercial property expert in the role of an evaluator.
The evaluator will develop, through discussions, an incisive analysis of the tenant’s grounds for non-payment and the landlord’s prerequisites for making concessions. The process gives both sides an opportunity to scrutinise proposals and the documentation on which they are based.
The evaluator helps maintain a balance between the parties in their negotiations, finds common ground where it exists and ensures the final decision on how to proceed is kept within their control and is made on a properly informed basis, taking into account the impact of the pandemic.
The benefits of appointing an evaluator
There are clear benefits to landlords and tenants in considering CRIES as an option in anticipation of and following the expiry of the moratorium.
First, the backlog in the courts, which has occurred as a result of the pandemic, means that where a landlord issues forfeiture proceedings there is likely to be a material delay in those proceedings being resolved.
Second, more than ever the courts may be 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 accommodation prior to any hearing.
Finally, where a landlord does forfeit the lease, the conditions in the market 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 an appropriate course of action, CRIES can be a useful solution for cases where the long-term relationship between the parties can be salvaged as the economy recovers, with the added benefit of saving costs and time.
Bringing in a third-party evaluator, who can facilitate and structure discussions between the parties, and help each of them to understand the position of the other, can lead to mutually beneficial solutions being achieved.
The service addresses a problem that cries out for a pragmatic approach.
