The UK Government last week (9 November 2021) announced that it would be pressing ahead with a legally binding arbitration procedure for determining the rent payable by a commercial tenant during those periods they were unable to trade because of the pandemic. The Government intends for the arbitration process to be in place by 25 March 2022 and that interim measures mean that landlords are effectively prevented from suing tenants for certain rent arrears before this date.
Paul Dench, partner in Glovers’ dispute resolution department, provides some clarity on the extent and significance of the proposed legislation.
Why is the announcement significant?
It is envisaged that from 25 March 2022 landlords and tenants will be able to refer the issue of COVID related rent arrears (protected rent) to an independent arbitrator to determine the amounts payable. Once enacted, the legislation will continue the protective measures against forfeiture and CRAR (currently under the Coronavirus Act 2020) for qualifying tenants when the moratorium comes to an end (on 25 March 2022) to enable arbitration to take place. Moreover, it effectively prevents landlords from suing tenants before the Bill becomes law and there will be a moratorium on action in respect of protected rents (including debt recovery and insolvency) for the period of six months from the date of the Act coming into force.
What has or will be implemented?
The Government has published the Commercial Rent (Coronavirus) Bill setting out details of the relief from the payment of COVID rent arrears available to qualifying tenants in the form of a legally binding arbitration process and also other protective measures. A new Code of Conduct has been published to supplement the Bill, which supersedes the previous code and sets out in detail the intended outcome of the Bill as well as the manner in which both landlords and tenants should approach and prepare for the arbitration process.
How does a tenant qualify for the relief?
A tenant must be a tenant of a commercial premises occupying for business purposes that was adversely affected by the pandemic because it was forced to close or cease trading by the Government.
What period of rent is protected and how is rent defined?
The "protected rent" is rent that was incurred from 21 March 2020 until 18 July 2021 (in England) or 8 August 2021 (in Wales) unless the restrictions for the relevant sector were lifted earlier than these dates. Rent is defined widely and includes an amount payable by the tenant to the landlord under the tenancy for possession and use of the premises and it also includes service charges, interest, insurance costs and VAT.
Can a landlord sue a tenant for rent arrears incurred during the protected period?
It depends. If the tenant is entitled to the relief and if the debt claimed relates to protected rent (see above), a tenant will be able to apply for any proceedings issued at Court from 10 November 2021 until the date the Bill becomes law (intended to be no later than 25 March 2022) to be stayed to allow for arbitration. In these circumstances the Court must grant the stay. If a judgment relating to protected rent is granted during this period, then a tenant may seek for it to be referred to arbitration for determination and, if referred, the landlord will not be able to enforce the judgment.
Can a landlord sue a guarantor for the protected rent arrears instead or draw down on the rent deposit?
The Bill clarifies that a "tenant" includes "a person who has guaranteed the obligations of the tenant under a business tenancy" and therefore landlords will not be able to pursue guarantors to recover the protected debt. The Bill also prevents a landlord from drawing down from a tenancy deposit to discharge the protected debt.
How do you start the arbitration process?
A tenant or landlord will be able to refer the issue of protected rent arrears to an arbitrator within the period of 6 months beginning on the date the Act is passed (although this could be extended). Before the referral the landlord or tenant should send a letter to the other party notifying them of an intention to refer and should set out proposals to settle the protected rent issue. The responding party has 14 days to set out a counterproposal. After the 14-day period has expired either the landlord or the tenant can apply for arbitration.
What will the arbitrator take into consideration when making an award?
When considering the award, the arbitrator will have regard to the "Arbitrator’s Principles" which are "preserving or restoring the viability of the business of the tenant, so far as that is consistent with preserving the landlord’s solvency" and if it is consistent with the above a "tenant should be required to meet its obligations as regards the payment of protected rent in full and without delay".
The onus will be on the tenant to demonstrate that its business is viable and, save for the protected debt, it has "the means and ability to meet its obligations and to continue trading" and that it is unable to afford to repay the protected debt. The tenant will be required to support its case on viability and affordability by providing evidence of its current and projected financial position. Conversely, a landlord can also provide evidence to demonstrate why a tenant’s proposed rent reduction is not acceptable and the impact it would have on its own financial position and/or solvency.
What does it mean for landlords?
Landlords may view the arbitration process and the inability to sue tenants for debts contractually owed as another tenant friendly measure imposed by the Government to exert pressure on them to agree unfavourable and potentially unviable financial proposals from tenants.
What does it mean for tenants?
Tenants will be negotiating from a much-improved starting position knowing that they will not be sued if they do not agree terms with a landlord and that the level of rent arrears incurred during the ringfenced period can ultimately be decided by an independent arbitrator if an agreement is not reached.
Although the Government has given us some much-needed guidance on the proposed arbitration process, it is clear that landlords and tenants will be expected to engage with each other in order to reach a settlement between themselves before starting the procedure. As arbitration will prove an expensive option for both parties, landlords and tenants are likely to perceive arbitration as the last resort.
Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.
For further information, please contact Paul Dench