With a third of UK small businesses highly indebted and insolvencies reaching their highest levels, the damage has already been done.
With a third of UK small businesses highly indebted and insolvencies reaching their highest levels since the beginning of the pandemic, the damage has already been done for many commercial tenants.
The government has released new laws and a Code of Practice to try to help commercial tenants and landlords resolve any remaining rent debts. The laws will protect tenants from CCJs, HCJs, and bankruptcy orders, which is very welcome news indeed.
The Code of Practice states that, in cases where tenants and landlords are yet to come to an agreement about the payment of rent arrears accumulated during national lockdowns, tenants should aim to meet the obligations of their lease “where it is affordable”. However, it goes on to explicitly state that “tenants should never have to take on more debt – or restructure their business – in order to pay their rent.”
Although this may come as a comfort to those tenants who have dug their heels in over the past months, some business owners may have accumulated debt in order to pay their rent. We would argue that, for anyone who borrowed money, made redundancies, or restructured their business in order to pay their rent, this Code of Practice comes too late. It offers business owners who have paid rent, but who are now struggling financially, no comfort or recompense for their previous sacrifices. Some of these businesses may be facing insolvency as a result of trying to do the right thing by their landlords.
If you’re one of the many businesses that are now struggling to survive, under a heavy burden of debt, speak to Cedar Dean today. We can help you restructure your commercial lease, even mid-term, to ensure a viable business in the future.
Heavy debt burden weighing down small business sector
The Insolvency Service found that 1,446 businesses were declared insolvent in September 2021, 56% higher than in September 2020. This illustrates the pressures businesses are under as we move into a period of less government support for Covid-impacted businesses.
The pressure of debt is driving these insolvencies and the number of debt relief orders (DROs) in September 2021 was up by 41% on September 2020 figures. Additionally, the Bank of England has reported that a third of UK small businesses have debts of more than 10x their cash balances, up from 14% before the pandemic.
These figures show that small businesses all over the UK have been borrowing money to meet costs – the greatest of which for many businesses is their rent. Despite the moratorium on commercial evictions being in place throughout the pandemic, many business owners made massive sacrifices or took out significant loans, to pay their rent. They did so for many different reasons. Some may have felt a sense of duty to their landlords, others may have simply been too scared of the consequences of missing payments, regardless of the government support.
Others may have simply felt it was the right thing to do or had come under immense pressure from landlords. Whatever their reasons, many will be regretting their choice as they face a very uncertain future. For them, the new Code of Practice, which finally states that businesses shouldn’t take on debt to pay rent, offers no solution.
A Code of Practice full of ambiguity
For those business owners who stood their ground and still have rent arrears, the Code of Practice will throw up yet more questions and areas of uncertainty for both themselves and their landlords.
Although the laws protecting tenants from legal action regarding their rent arrears are clear, we would argue that much of the Code of Practice is still up for dispute and misinterpretation. Although it does make attempts to set out the meanings of terms like ‘viability’ and ‘affordability’ we still expect these terms to mean different things to different people.
Then there’s the issue of the dates of closure and reopening. The laws that have been brought in apply to commercial rent debts accrued by businesses that were mandated to close, either in full or in part, from March 2020 until the date restrictions were lifted for their sector. Again, interpretation of these dates will differ between landlords and tenants. Tenants are likely to view partial reopening differently to their landlords in terms of their liability to pay rent. This could further damage relationships between tenants and landlords and increase the likelihood that a case will end up in arbitration.
Whatever your current situation with regards to Covid-specific rent arrears, as a commercial business tenant, you have Cedar Dean on your side. We understand the complexities of this situation and appreciate the nuances in each lease and each set of circumstances. We can help rebuild your relationship with your landlord through a process of sustainable lease restructuring, providing stability for landlords and affordability for tenants.
