Commercial Rent (coronavirus) Bill: Part 1

Unprotected debt vs protected debt

Unprotected debt

Unprotected debt is any debt that is not protected debt. Obvious but important.

The easy first step is to establish when the debt was incurred.

Identifying protected debt

Protected debt is any amount payable for use of business premises whether described as rent, service charge, insurance, topping up a rent deposit, interest and VAT.  This debt is protected if:

• the tenancy was "adversely affected by coronavirus"
• it accrued during a period ring-fenced by the Bill (the “protected period").

A tenant is treated as being adversely affected by coronavirus if they were required to close all or part of their premises or business due to COVID-19 restrictions.  The protected period begins on 21 March 2020 and ends on or before 18 July 2021 in England or 7 August 2021 in Wales. However, the end date may vary if any closure requirements or specific coronavirus restrictions were no longer in place for particular businesses. Therefore, the protected period will vary from business to business.

Identifying the end date for the protected period for the specific debt is important. If premises or parts of premises were subject to a closure due to coronavirus restrictions, they will be regarded as adversely affected by coronavirus.  For these purposes, it is irrelevant that specific activities could continue, such as takeaway food from a restaurant.

The new Code of Practice for Commercial Property Relationships includes graphs of the mandated closures at Annex A and is an important reference tool.

Some other factors to be aware of

Not all tenancies are protected

The Bill is applicable to any business tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies. This means it does not apply to licences, tenancies for six months or less, agricultural holdings and some other leases. If there is doubt, then this needs to be checked.

Existing agreements on debts

Existing agreements concerning payment of protected debt are unaffected by the Bill and cannot be referred to the arbitration scheme.

Appropriation rules – what to do with unallocated payments

When a payment is received that is not specified for a particular debt a landlord can normally decide to what debt it should be applied. The Bill will change the appropriation rules for protected debt and are retrospective to the end of the protected period. Landlords must apply such payments to unprotected debt first and review such allocations since July 2021.

Debt recovery options

Parties are expected to negotiate a settlement in relation to protected debt. Either the landlord or the tenant may refer a protected debt to arbitration during the six-month period starting on the date when the Bill comes into force. See Commercial Rent (Coronavirus) Bill Part 2 for further details about this arbitration.

The Bill introduces a new temporary moratorium from the passing of the Bill prohibiting certain enforcement methods for protected debt. The moratorium will apply until the conclusion of an arbitration or, if no reference to arbitration is made, six months after the Bill is passed.

From 26 March 2022 existing restrictions on recovery of unprotected debts are expected to be removed.

If you wish to discuss any issues regarding a protected rent debt contact, please contact the authors of this article.

Read Part 2 here.