Commercial Rent (Coronavirus) Bill – How helpful is the recently published guidance?

With two weeks to go until the Commercial Rent (Coronavirus) Bill ("the Bill") is due to become law, we consider the draft guidance for arbitrators.

On 23 February 2022, The Department for Business, Energy & Industrial Strategy (BEIS) published its eagerly awaited working draft guidance paper on how arbitrators should exercise their functions under Part 2 of the Bill.

The Government has welcomed views and comments on the draft guidance so that it can be developed.  The intention is to publish the complete statutory guidance after the Bill has received Royal Assent (currently estimated to take place on 25 March 2022).

The guidance is intended to provide an explanation of:

1. The provisions of the legislation relevant to arbitrators and of the Arbitration Act 1996; and
2. The concept of “viability of a tenant’s business” in the Bill, which will be developed further following input from stakeholders.

The arbitration process

The arbitration process under the legislation can be divided into 3 stages:

Stage 1 – The pre-arbitration stage

A reference to arbitration must be made within 6 months of the Bill becoming law.

Before a party can make a reference to arbitration, they must comply with certain requirements, including:

• Notifying the other party of their intention to make the reference;
• Once the prescribed time limits have elapsed, making a reference to an approved arbitration body;
• Preparing a formal proposal for resolving the dispute with supporting evidence which shall accompany the reference. The applicant must pay the arbitration fees in advance of the arbitration taking place and ideally at the time the reference is made.

An arbitration body obtains approval from the Secretary of State.  The arbitration body will be responsible for (i) maintaining a list of arbitrators that appear suitable due to their qualifications and experience, and (ii) appointing arbitrators to deal with arbitrations.

The parties can agree the number of arbitrators to form the tribunal and whether there is to be a chairman.  If there is no agreement, the tribunal will consist of a sole arbitrator.

A reference cannot be made where the tenant is subject to a CVA, IVA or compromise arrangement.

Stage 2 – The arbitrator’s assessment of whether the dispute is eligible under the Bill

Once the reference has been made, and the arbitrator has been appointed by the arbitration body, the arbitrator will need to determine whether the dispute is eligible.  This requires the arbitrator to consider whether:

• The tenancy in question is a “business tenancy”, being a tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies.
• The rent in dispute is a “protected rent debt”, being a debt for unpaid rent under a business tenancy which was adversely affected by coronavirus and where that rent is attributable to occupation during a “protected period”.
• A dispute exists and the parties have not reached agreement on relief from payment of the “protected rent debt” (i.e. they have not agreed between themselves to write off the debt in whole or in part, to give further time for payment, and/or to reduce or write off any interest payable).
• The tenant’s business is viable or would be viable if given relief (there is therefore a cross-over with the arbitrator’s assessment of the principles in making the award in Stage 3 below).

Stage 3 – The arbitrator’s assessment of the matter of relief from payment of a protected rent debt

Having established that the dispute is eligible, the arbitrator will need to decide on whether relief is appropriate.  Unlike the usual form of arbitration with statements of case, the arbitrator will need to:

• Consider the formal proposal(s) submitted by one or both of the parties and the accompanying evidence.
• Apply the principles in the Act that:
  • The award should be aimed at preserving or restoring and preserving the viability of the tenant’s business so far as that is consistent with preserving the landlord’s solvency; and
  • The tenant should, so far as consistent with the first principle, be required to meet its obligations to pay the protected rent debt in full and without delay.

The principles are applied to the parties’ final proposals and the arbitrator must make an award on the basis of the final proposal that is most consistent with the principles.  If only one proposal has been submitted, or only one proposal is consistent with the principles, the arbitrator must make an award in accordance with that proposal.  If no proposal is consistent, the arbitrator may make whatever award they consider appropriate applying the principles.

The arbitrator may, whether or not the parties agree, appoint experts or legal advisors to report to it and the parties and appoint assessors to assist on technical matters, including at the hearing.  It is expected that the parties will be responsible for the costs of the third party.

Under the Bill, the parties have the right to request an oral hearing.  The arbitrator does not have discretion to deny that request.  An oral hearing will need to be held within 14 days of the arbitrator receiving the request.  The parties can agree to extend this or the arbitrator can extend it if reasonable in all the circumstances.

Where there is no oral hearing, the award must be made “as soon as reasonably practicable” after both parties have put forward a final proposal.  If there is an oral hearing, the arbitrator must make an award within 14 days of the hearing except that the parties can agree to extend this or the arbitrator can extend it if reasonable in all the circumstances.

Awards under the legislation may be challenged or appealed via sections 67 to 71 of the Arbitration Act 1996 (as modified by the Commercial Rent (Coronavirus) Bill.  This means that, subject to a party first exhausting any arbitral process of appeal of review under the Arbitration Act (to correct or require an additional award), within 28 days of the award a party can:

• Apply to the court to challenge an award as to its substantive jurisdiction or for an award to have no effect because the arbitrator did not have substantive jurisdiction;
• Apply to the court to challenge an award on the basis of serious irregularity affecting the tribunal, the proceedings or the award;
• Appeal to the court on a question of law arising out of any award.

Viability of a tenant’s business

Tenants will be required to demonstrate the viability of their business as part of the process.  The guidance explains that viability has deliberately not been prescriptively defined to take into account different business models and different business sectors.

The guidance sets out a summary of the “tools and processes” that arbitrators may find useful in assessing viability.  These include:

• The assets and liabilities of the tenant, including any other tenancies to which the tenant is a party;
• The previous rental payments made to the landlord;
• The impact of coronavirus on the tenant’s business;
• But disregarding the possibility of the tenant borrowing money or restructuring their business.

In looking at the above, the arbitrator may have regard to:

• Bank account information;
• Gross profit margin and net profit margin;
• Financial and management accounts;
• Details of dividend payments;
• Evidence of any financial grants and/or loans obtained;
• Evidence of prior refusal of further credit, funding or lending;
• Evidence of overdue invoices of tax demands, exceeding overdraft limits, unpaid or returned cheques or electronic payments, creditor demands, money judgments;
• Liquidity, gearing and current ratios;
• Profit forecasting.

The guidance suggests that the first 2 points may be the most useful indicators as to viability.  Arbitrators may need to request additional information to consider how businesses may have performed prior to, during, and after the mandated closure period.

The guidance recognises that smaller businesses may not be able to readily produce certain financial information, such as profit and performance forecasts.  This is therefore not intended to be an exhaustive and prescriptive list of factors.

Commentary

The draft guidance provides a welcome outline as to how the statutory arbitration process is to work.  However, the final version of the guidance is not expected to be made available until the Bill is passed into law, by which time the clock will start ticking for parties to make their reference.  It is possible that the guidance will be developed as various stakeholders make comments on it.

At this stage, it is clear that the intention is for the arbitrators to carefully consider the parties’ proposals and to make an award in accordance with one of the proposals if possible. It is only if the proposals are not consistent with the principles set out in the guidance that the arbitrator can make whatever award they consider appropriate. Therefore, parties should consider the proposals they make very carefully and try to formulate a proposal in accordance with the guiding principles.

Parties also need to be prepared to give the arbitrator the information they need to assess viability and if they cannot do that, or do not want to, they may want to consider trying to reach an agreement outside of the arbitration scheme instead.

Now that we have a better idea of the process, parties can also consider the likely management time and costs involved in the arbitration process in helping determine their strategy for dealing with rent arrears. It is still to be seen how many landlords and tenants will utilise this process and how many will seek to reach agreement outside of it.