Covid rent arrears: Government announces a new, binding arbitration process

Announcement

On 9 November 2021, the Government published the Commercial Rent (Coronavirus) Bill, which is expected to come into law before the expiry of existing moratorium measures in March 2022. The Bill will require commercial landlords and tenants to use a legally binding arbitration scheme to resolve any outstanding lease arrears built up during periods of enforced closure during the Covid-19 pandemic, with an updated (but non-binding) Code of Practice governing any continuing negotiations taking place in the interim.

The Code of Practice – and, by extension, the Bill – operate on an industry-by-industry basis, setting out the periods for which arrears should be treated as “ring-fenced” for different commercial occupiers. For instance, garden centres in England will see arrears treated as ring-fenced only for the period to May 2020, whereas hospitality and nightclub venues will have their arrears protected for the period to July 2021.

Bar on claims

Once the Bill is passed, landlords will for the first time be barred from making court claims for such “ring-fenced” arrears until the end of any arbitration period (anticipated to run for six months from March 2022). They will also be prevented from (i) using CRAR, (ii) forfeiting tenants’ leases on grounds of the unpaid rent, (iii) using tenancy deposits to clear the arrears, and (iv) presenting winding-up/bankruptcy petitions (the latter of which, like court claims, has not previously been restricted).

Acknowledging the time delay until the Bill has legal force, the Government also intends to give these measures retrospective application. The restrictions on pursuing and/or enforcing a court claim will apply to any claim made on or after 10 November 2021, with arbitrators having the ability to grant relief from enforcement.

Powers of arbitrators

The Government’s intention is for landlords and tenants to use the arbitration scheme, and for arbitrators to have the power to reduce rent arrears if the tenant’s business is otherwise viable. The possibility of the tenant borrowing money or restricting its business is to have no part in the determination of viability in this context.

Instead, arbitrators will have regard to the assets and liabilities of the tenant, previous rental payments made, the impact of coronavirus on the business of the tenant, and any other relevant information about the financial position of the tenant. The Bill states that any award should be aimed at preserving the viability of the tenant’s business so far as that is consistent with preserving the landlord’s solvency. The landlord’s solvency for this purpose simply means its ability to pay its debts as they fall due.

If a tenant can meet its rental obligations, the Bill strongly suggests that they will be required to do so. If the arbitrator considers that the tenant should be afforded time to repay any arrears, the maximum permitted period will be 24 months.

Procedure

To initiate the arbitration process, either the landlord or tenant will be entitled to make a reference to an approved arbitration body within six months of the Bill being passed (provided they have first given notice to the other party). Any reference to arbitration must include a formal proposal for resolving the arrears, with the other party then having 14 days to submit an alternative proposal.

Arbitrators will be able to decide cases on paper or after hearing oral arguments at a hearing. It is intended that any award will be made within 14 days of a hearing, although much is likely to depend upon the volume and complexity of the cases referred and the number and availability of approved arbitrators. Awards will be published, but with any confidential information redacted.

There are restrictions on the arbitration procedure being used where other schemes are already in place – such as company voluntary arrangements, individual voluntary arrangements, or sanctioned compromises or arrangements – although those are beyond the scope of this initial note.

Conclusion

Whilst the Bill is not yet law, and may well be amended before becoming law, it is likely to have an immediate impact on commercial landlords and tenants where there remain arrears of rent built up during the pandemic. Until now, landlords – whilst deprived of many enforcement options – have been free to commence court claims for any unpaid rent, utilise rent deposits, and pursue the bankruptcy of individual debtors. The draft Bill and updated Code of Practice effectively remove these options entirely, leaving landlords with very little means of enforcing pandemic arrears and a wait of another four months before they can even consider instigating the arbitration process.

We will produce further updates and thoughts as and when additional information becomes available. Please feel free to contact the authors Richard Evans and Liam Bell in the meantime.

Disclaimer: We at Memery Crystal (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors of articles published on our website(s) do not necessarily reflect the opinions, views, practices and policies of either Memery Crystal or RBG Holdings plc.