LITIGATION TEAM
In November 2021 the Government introduced the Commercial Rent (Coronavirus) Bill. The Bill introduces a ringfence for rent debts built up as a result of mandated business closures during the Covid-19 pandemic and establishes a new binding arbitration process. This process is intended to resolve disputes between commercial landlords and tenants relating to the payment of Covid-19 rent arrear payments. The Government’s intention is that, where possible, rent debt accrued as a result of forced closures during the pandemic should not force an otherwise viable business to cease operating.
Examples of businesses to which the Bill will apply are gyms, pubs, restaurants, retail, leisure, manufacturing, industrial and logistics, and sports, closed during the pandemic. It does not apply to tenants who voluntarily chose to close during “the protected period” (in England generally from 21 March 2020 to 18 July 2021). The protected period will also depend on the closure requirements or specific coronavirus restrictions for that particular business. The end of the protected period is the last day the business was subject to a closure requirement or a “specific coronavirus restriction”. This means that the protected period will vary from business to business. For example, for a non-essential shop, the protected period is generally 21 March 2020 to 12 April 2021 (when non-essential shops reopened in England).
It is the Government’s intention that protected rent debts be resolved by mutual agreement, or by the Bill’s arbitration system, which considers both parties’ circumstances in the context of the pandemic. The definition of rent includes service charges, late payment interest, insurance rent and VAT. It also includes drawing down on a rent deposit.
The Bill will enable landlords and tenants to apply to an arbitrator to resolve any disputes regarding the ring-fenced rent debts. It is supported by a new Code of Practice. Binding arbitration is to only be carried out in cases where landlords and tenants are not able to come to an agreement. The Code of Practice sets out:
- What the arbitration process will look like;
- The type of evidence considered; and
- The key principles of Viability and Affordability to be adhered to.
The Code represents best practice and applies to all commercial leases held by businesses with rent arrears (including sums owed for service charges and insurance) accrued due to the impact of the Covid-19 pandemic. There is a continuing expectation that tenants who are able to pay their rent in full should do so. The viability of the tenant’s business is paramount but not at the expense of a landlord’s solvency. Landlords and tenants are encouraged to be transparent and exchange information as to their circumstances.
The Bill will allow a stay of any debt claims that include ringfenced debt and are issued between 10 November 2021 and the Bill coming into force, which is expected to be on or before 25 March 2022. The Bill is currently going through the second reading stage in the House of Lords and there may be some changes before it is passed. Any ringfenced debt under these claims, and any County Court or High Court judgments made in respect of such claims are to be subject to arbitration. Any registration of such judgments for ringfenced debt may be cancelled following an arbitration award. The Bill will prevent the issue of debt claims, including ringfenced debt, until the end of the arbitration application period or the arbitration process.
The Bill will also prevent a landlord from petitioning for bankruptcy of a business tenant such as a sole trader, based on non-payment of a statutory demand relating to any ringfenced debt served on or after 10 November 2021 and before the Bill comes into force. It will also prevent a petition based on a judgment debt if the claim was issued in this period. If a petition is presented or an order is made relying on such a petition in this period, the Bill provides for these to have no effect. The Court will have power to restore the debtor to which the petition or order relates, to the position it was in immediately before the petition was presented.
It is the Government’s intention that protected rent be resolved by agreement or through consideration of both parties’ circumstances. As the Government discourages landlords from drawing down on tenancy deposits or where already drawn, requiring landlords to top them up to cover ringfenced rental arrears, the Bill suspends the requirement for the tenant to top-up the deposit and the sum drawn down may be considered within arbitration.
Tenants are encouraged to specify which period of rent is being paid for. If an unspecified amount is, or has been, paid by the tenant following the end of the ringfenced period, the Bill provides for it to cover rent outside the ring-fenced period before it is used for the ringfenced period.
The moratorium on forfeiture and restrictions on the use of Commercial Rent Arrears Recovery (CRAR) regime remain in place until 25 March 2022, unless legislation is passed ahead of this. There are restrictions on presenting of winding-up petitions until 31 March 2022.
Following the replacement of the current protections with the Bill’s arbitration legislation, for debts outside the scope of the Bill’s binding arbitration process, landlords will be able to exercise their ordinary remedies in the ways they did prior to the introduction of the moratorium in March 2020. For debts within the scope of the Bill, these ordinary remedies will be available after the application period for arbitration if no application is made. If an arbitration award is made and not complied with, then the usual remedies would apply.
A petition for bankruptcy relating to debts within the scope of the Bill where the statutory demand or claim on which the petition is based was issued between the 10 November 2021 and commencement of the Bill will be effectively void, and any order made relying on such petitions would also be void.
Under the arbitration scheme, the landlord or tenant may only refer arrears that relate to a protected period to arbitration within a six-month time period, starting on the date of when the legislation comes into force. Tenants who fail to apply for arbitration during the six-month window will have no further protection.
If an agreement cannot be reached between the landlord and tenant, either party can apply for the matter to be referred to the binding arbitration scheme. The first stage of the process requires a letter of notification by either party including a proposal for settlement of the rent arrears in line with the new Code. The other party will then have the opportunity to accept or respond with a counterproposal. If this does not result in an agreement, an application for arbitration can be made.
The other party has 14 days to submit their own proposal and both parties are encouraged to include evidence. The parties will then have the option to request a public hearing for the arbitration which the arbitrator will seek to conduct within 14 days. If no request is made, the arbitrator will consider the matter based on the documents provided. These periods may be extended by agreement between the parties or by the arbitrator where the arbitrator considers that it would be reasonable in all the circumstances. Both parties will be notified of the award made within 14 days of the arbitration hearing and the arbitrator’s award will be legally binding.
When deciding what award to make, the arbitrator will assess the proposal and evidence submitted by both parties in accordance with the principles of viability and affordability set out within the new code. For example, if the arbitrator considers one of the proposals to be in line with those principles, the arbitrator will make an award on those terms or if both are in accordance then it simply comes down to whichever is most consistent.
If the arbitrator determines that the business (a) is not viable, and (b) would not be viable even if the tenant were to be given relief from payment of any kind, the arbitrator must dismiss the reference. In making a decision, the arbitrator must have regard to certain factors set out in the Bill. These include the tenant’s assets and liabilities, any other tenancies the tenant may have, and any financial information the arbitrator considers appropriate. No regard may be had to the possibility of the tenant (or the landlord) borrowing money or restructuring its business.
If the arbitrator concludes that the tenant’s business is viable, the arbitrator must make an award which accords with those principles set out the Bill, namely:
- an award should be aimed at preserving or restoring the business of a tenant, while preserving the solvency of the landlord; and
- so far as is consistent with that, the tenant should be required to meet its obligations without delay.
An award may reduce the rent debt or to give the tenant extra time to pay (a maximum of 24 months). The Government is currently working on a register of arbitrators, but it is expected to be a list of surveyors and accountants.
In view of the uncertainty and costs faced by both parties, the prospect of an arbitration may be sufficient to lead the parties to negotiate a resolution by consent.
If you require any further information in relation to the Bill and/or the Code of Practice or if you have any enquiry in relation to rents payable under business tenancies, please contact Jeremy Newman on 01582 466150 or at j.newman@pmsolicitors.co.uk.