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The impact of COVID on the landlord-tenant relationship

7th December 2021

Wilberforce Chambers held a discussion concerning the state of the commercial landlord and tenant relationship and the impact of COVID-19 on its future.

The discussion was moderated by Liz Hamson, Editor of Property Week, and included four contributing panellists – Joanne Wicks QC of Wilberforce Chambers, Tiffany Scott QC of Wilberforce Chambers, Nick Wood of Cameron McKenna Nabarro and David Cooper of David Cooper & Co.

Our Head of Membership Services, Tony Milligan, also attended the event.

Some of the topics discussed during the discussion included: reforming the Landlord and Tenant Act 1954, the concept of “contractual allocation of risk”, the various different possible methods for dispute resolution, the government’s Code of Practice(s) for commercial tenants and landlords to resolve pandemic rent disputes, the proposed arbitration scheme due to come into force in March 2022, when the eviction moratorium ends, to resolve pandemic rent disputes and what the impact of all this could be on the commercial tenant-landlord relationship.

A summary of the key points and takeaways to be taken from the discussion can be found below.

Allocation of risk

Firstly, Nick Wood discussed the concept of “contractual allocation of risk between parties”, suggesting that this concept could later lead to “long lasting contractual change”. Given the unprecedented circumstances which commercial tenants and landlords found themselves in during the pandemic, neither party would have thought to include clauses in their leases which deal with what would happen in the event of a pandemic.

Some of the panellists felt that this could be a change we may see in the future. Firstly, that we see the introduction of pandemic clauses in new leases going forward, so that both parties are contractually aware of their obligations in the event of a pandemic, but secondly that the allocation of risk within leases may be more at the forefront of both parties’ minds when they enter into negotiation.

Landlord-tenant dispute resolution methods

Regarding dispute resolution methods, David Cooper talked about how he does not tend to suggest mediation to his tenant clients because “they think it is expensive and it is not binding”. He added that “the problem with the mediators are they are seen as being landlord-related in one form or another. He admits that this point of view “might be entirely wrong but that’s the perception that’s been passed over to me”. He adds that his tenant clients are “happier frankly to go to court at the end of the day”.

With the Government proposing to resolve the pandemic commercial rent debt crisis by an arbitration process, Nick Wood raised the question of whether or not the use of arbitration as a means of dispute resolution could be more widely applied in the commercial property market and whether this could be a positive move for the sector.

Nick raised the issue that “if you are an occupier with a number of leases, which are all running into arbitration, and you’re looking at viability and affordability…I think that it can get quite vexed quite quickly [and] I’m not sure how we deal with that”.

Another interesting point raised by Joanne Wicks QC, was on the scope of the arbitration scheme and the fact that not all those commercial tenants and landlords will be able to apply for arbitration.

She explained how the commercial tenants and landlords, who have already come to an agreement, will not be able to apply under the scheme and how there may be people on both sides of the negotiation who may feel like “they might have done better had they waited for the arbitration scheme.”

She also mentioned how, in her view, the legislation has been drafted on a “one size fits all” basis and “on the assumption that you’re going to have a single landlord, a single tenant and it’s all going to be rather straightforward”. However, it will not always be this straightforward and there may be certain complexities to certain cases, for example if you are an occupier with multiple premises.

She also raised the question of how the legislation will affect guarantors and those who have their rent liabilities guaranteed, taking into account these slightly more complex situations where an occupier has multiple leases across several sites or where there are guarantors involved.

Later in the discussion, an audience member asked a question stating “the code ought to be mandatory and the arbitration process is flawed – what about all those sectors and tenants that were not mandated to close but still had a significant drop in revenue during COVID”, which Joanne replied as being linked to this issue of scope.

Similarly, another audience member asked “if a tenant receives a 15-month COVID rent holiday, but is only willing to pass on a 12-month rent holiday to his sub-tenant who occupies the entire premises, does the sub-tenant have a significant argument for a longer period in arbitration?”.

Comparisons with the Australian Scheme

Tiffany Scott QC, then discussed how other countries, such as Australia, have addressed the pandemic rent debt situation in their country. She explained:

“The Federal government brought in a mandatory code…very early on in the pandemic…back in April 2020 [which] required landlords to offer their tenant proportionate reductions in rent in the form of waivers and deferrals…based on the reduction in the tenant’s trade for the pandemic period and the subsequent period that is allocated for recovery.”

However, there is a provision so that the scheme only applies to companies worth 50,000,000 Australian dollars or less. In the UK, our scheme is a “one size fits all” scheme.

In particular, the recovery period is perhaps something that the UK Government has not considered in its proposed arbitration scheme. Indeed, the CTA conducted a survey among our membership and confirmed that large numbers reported to be experiencing levels of trade significantly lower than their pre-pandemic levels, whilst their landlords assume that “everything is back to normal” and are demanding full rents.

In the Australian scheme, Scott mentioned that landlords’ financial ability to provide a waiver was also considered in the dispute resolution process. However, she pointed out that this code of practice was implemented at a federal level in Australia, and so each state has implemented its own version of the code. As such, there is no consistency across the different states and there are still issues with the scheme.

Questions surrounding the arbitration scheme

Scott highlighted some key questions to consider with regards to the arbitration process in the UK:

  • What is the level of detail required to establish whether a tenant is viable under our scheme?
  • What evidence might be helpful to establish whether there is a decline in turnover due to the pandemic?
  • If the tenant’s post-lockdown turnover has been very healthy. How is that going to be considered?
  • How is the arbitrator or the tribunal gong to balance the parties’ respective financial positions?
The Code of Practice

The discussion then moved on to the Government’s Code of Practice and whether or not the panellists thought there had been compliance of this code throughout the pandemic period.

Nick Wood pointed out there were two iterations of the Code, one in draft form released in June, and the more recent Code of Practice announced in November (along with the announcement on the draft legislation relating to the proposed arbitration scheme).

Despite describing the first iteration of the code, released in June, as “like a direction to play nicely in the sandpit”, he was more optimistic about the second iteration, saying that he thinks there is going to “be a lot of work done now [to ensure]…adherence to that code and it is much clearer now as to what the gateways and framework of the arbitration scheme are”. He also held the optimistic view that “the Government…expect a lot of this rent debt to be settled before we get into arbitration proper”.

David Cooper was more doubtful as far as compliance to the Code of Practice was concerned. He said:

“Both iterations of the code, as far as my clients are concerned, have not worked at all. They’ve just ignored it because there was no sanction behind it and there was no reason for them to go along with it. They could do what they wanted, and every landlord that I dealt with blamed the banks at the end of the day. It wasn’t them [the landlords], it was somebody else who was pulling the strings and they had to get the rent in…I’ve got very little faith in the codes”.

Joanne Wicks QC added:

“I tend to think that people only comply with voluntary codes when it suits them. It might suit them to demonstrate compliance with the code for the purpose of showing that to an arbitrator further down the line, but whether they would do it if there wasn’t that arbitration backstop, I’d have my doubts.”

Final points

The discussion then moved on to the final points of the debate, which were the existing landlord-tenant relationship and what each of the panellists thought about its future.

David Cooper made two very interesting points:

Tenants tend to be small independent businesses and that “the finances of the landlord and the finances of the tenant are not [usually] of equal value.” Therefore, the tenant always feels like he is “on the back foot” when going entering into a legal process to resolve disputes between the two parties. Smaller commercial tenants are often not in a position to be able to dedicate the time nor the resources to pay for the legal costs associated with resolving disputes through a legal process.

Secondly, he stated that what is seen in negotiations as “good for the tenant is [seen as] bad for the landlord and what is bad for the landlord is [seen as] good for the tenant”.

However, he believes it is not impossible to achieve a more level-playing field between landlord and tenant. He gave the example of a client of his, who was dealing with a Dutch commercial landlord:

“I know nothing about Dutch Law, but I can read the lease, which has been translated into English, and my god it is a much more evenly written lease. It’s based on the retail price index…everything in there looks more balanced than it is over here. That’s the only one I’ve ever seen…outside the UK and it came as a shock to me how balanced it was”.

In terms of what the panellists thought about the future of the tenant and landlord relationship, the general consensus among the panellists was that it would be a return to “business as usual” in the not-too-distant future. Indeed, Nick Wood said “I think the pandemic and the crisis has brought about some extreme litigation…I think things will get back to normal over the next 18 to 24 months”.

Joanne Wicks QC added:

“I’m not in the markets…but it seems to me part of the issue is that whatever gains tenants can make now, as a consequence of market changes, are unlikely to be baked in for a very long period because most of them don’t take leases for a very long period of time and so once the market swings back it’s likely…that there will come back to business as usual.”

David Cooper made the closing remarks of the debate, stating what his take on the future of the landlord-tenant relationship could be: “I think the relationship between the landlord and tenant was bad on a negotiating basis, pre-COVID, and it is now dramatically worse.”

He finished off his closing remarks by comparing the landlord and tenant relationship to family law and divorce. In his opinion, commercial tenants and landlords seem to “fight over everything”. He adds that “it’s sad and I’m not sure how you recover it. I think the only way of doing it is to prohibit things which make the situation worse, and that can only be done by legislation”.

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