The UK government is extending a moratorium on commercial rents until March next year and introducing a mandatory arbitration process to tackle debts where landlords and tenants cannot agree.

The changes provide relief for thousands of businesses that were facing huge rent bills from 1 July when the current moratorium on evictions for unpaid rent was set to end.

With many food, drink and entertainment venues still shut or operating at less than full capacity, hospitality leaders had warned of a “cliff edge of failure” without a longer grace period.

Landlords were down £5.3bn on rents last year, according to data from analysts at Remit Consulting, while two-thirds of retailers have said they had been threatened with legal action by landlords looking to collect payments.

Steve Barclay, the chief secretary to the Treasury, told parliament on Wednesday the government was taking action because of the “threat to jobs” in many businesses affected by the pandemic. “We believe this strikes the right balance between protecting landlords and supporting those businesses that are most in need,” he said.

However, it comes as Rishi Sunak resists providing further financial support for businesses despite the government delaying the removal of Covid-19 pandemic restrictions in England by four weeks from 21 June.

The chancellor argues that the Treasury “went long” at the March budget by extending furlough until the end of September, adding that growing numbers of firms are struggling with staff shortages. Furlough is due to be scaled back from the start of July.

Rachel Reeves, the shadow chancellor, warned there was a growing risk companies would fail because of the premature withdrawal of support. “Having spent billions, it is tragic to see businesses go to the wall just because the government withdrew support a few weeks too soon,” she told the Commons.

Barclays said the moratorium on business debts would last until the Treasury had legislated to create an arbitration system for landlords and commercial tenants by spring next year.

Those businesses no longer facing trading restrictions should start to pay rent again, he said. The government’s stipulation comes after landlords said certain tenants are exploiting the situation by refusing to pay despite being capable of doing so.

Barclay said new laws would provide a “backstop” where commercial negotiations over rent payments were not successful and would provide a “a long-term solution to the resolution of Covid-19 rent”.

The measures protect commercial tenants from eviction until 25 March 2022 but only make arbitration mandatory for periods when businesses were forced to close by government lockdown edicts. Agreement on rents when during period when businesses could trade are down to landlords and tenants.

While evictions will be blocked until next year, statutory demands and winding up petitions relating to rent debts built up during the pandemic will remain restricted only until the end of September, raising the possibility that businesses will be forced into financial difficulties then.

Helen Dickinson, the chief executive of the British Retail Consortium, which represents thousands of businesses, welcomed the adoption of binding arbitration agreements and extension of the moratorium.

“This is a very welcome announcement, addressing an issue of vital importance in the nick of time. We will be looking closely at the details, but welcome the continued support provided by government to businesses.

“Just as retailers feared a wave of legal action by landlords, the government has stepped in to offer both landlords and tenants more time to negotiate. The last 15 months have seen extended periods of forced closure for retailers, preventing many from making the turnover needed to cover rents. Retailers need time to trade their way out of debt; this announcement does exactly that.”

The hospitality industry said the measures would bring back stability to an “uncertain and unsettled property market”.

Kate Nicholls, the chief executive of trade body UKHospitality, said: “These measures are wholly welcome and will banish a grim shadow that has hung menacingly over hospitality since the Covid crisis began 15 months ago.”

However landlords said the government should have moved earlier to bring in the arbitration process to help more vulnerable companies as another extension of the moratorium would continue to leave landlords out of pocket.

Melanie Leech, the chief executive of the British Property Federation said: “The blanket extension to the moratoriums will provide further opportunity for those well-capitalised businesses who can afford to pay rent, but are refusing to do so, to continue their abuse of government and property owners’ support and will cast a long shadow over future investment to build back better.”