What do the Government proposals for the new arbitration scheme to deal with rent arrears that accrued during the COVID-19 pandemic mean for landlords and tenants?

On 9 November 2021, the Government presented the Commercial Rent (Coronavirus) Bill ("the Bill") to Parliament providing the detail of the proposed arbitration scheme to deal with rent arrears that accrued during the COVID-19 pandemic. Whilst this is subject to change before it becomes law, it contains significant proposals that will affect both landlords and tenants. The Government also published a new Code of practice for commercial property relationships (the "Code").

The Bill essentially allows for the ring-fencing of rent debt built up by certain businesses who were subject to mandated closure (in full or in part) during the pandemic by law, such as pubs, gyms and restaurants.  It establishes a binding arbitration system which will then decide what happens to that ring-fenced debt.  Moratorium measures will continue until the Bill has become law.

We have prepared a summary of the key takeaways from the Bill as it applies to England, which aims to address rent arrears accrued during the COVID-19 pandemic by businesses that were legally obligated to remain closed.

When does the Bill apply?

1. The Bill applies to any “rent” attributable to a “protected period” that was payable under a business tenancy “adversely affected by coronavirus”.
2. “Adversely affected by coronavirus” means that the whole or part of the tenant’s business or premises were required to be closed during the “protected period”, which is from 21 March 2020 to the last date restrictions were removed from the business tenant’s sector. This means that the period of rent which will be covered by the arbitration scheme will be different for different sectors. It is immaterial that specific limited activities could be carried on at the premises, despite the obligation to close, such as where a restaurant was able to run a takeaway delivery service. The restaurant here would still fall within the scope of the Bill.
3. Businesses that were not legally obliged to close, such as essential retail, industrial units and offices, will not be subject to the arbitration scheme.
4. The definition of rent includes service charges, insurance rent, late payment interest and the requirement to top-up rent deposits where the landlord has drawn-down on the deposit to cover rent arrears accrued during the “protected period”.

What is the arbitration process?

5. Where the Bill applies, parties will have a 6-month application period to apply for statutory arbitration in respect of the protected rent arrears from the date that the Bill is passed (which is currently targeted for 25 March 2022).
6. Parties undertaking the binding arbitration process will be required to make offers to each other as part of both the compulsory pre-application stage (which can take up to 28 days) and the arbitration process itself by reference to the principles, behaviours and affordability criteria of the Code, including the exchange of evidence in respect of affordability.
7. If an application for statutory arbitration is made, the arbitrator will seek to conduct a hearing no more than 14 days from the receipt of a request for hearing. If no hearing is requested, the arbitrator will consider the matter based on the documents provided. Where an oral hearing is held, the arbitrator must make an award within 14 days of the hearing. Whether these timings are realistic will depend on the number of cases referred to statutory arbitration and the number of arbitrators appointed.
8. The arbitrator will make the award with reference to the principles set out in the Code, including the preservation of the viability of the tenant’s business subject to the landlord’s solvency. The current drafting of the Bill provides for the award to: write off of a proportion of the protected arrears, provide further time for the tenant to pay, and/or reduce any interest payable in relation to the protected arrears.  It remains to be seen how favourable the awards will be towards tenants or landlords and, in practice, it is possible there could be a difference between different arbitrators in terms of approach.  The Government can publish further guidance for arbitrators and therefore further criteria may be applied in due course.
9. The arbitrator’s award will be legally binding although there will be grounds for appeal in “limited cases”. The maximum timeframe to repay pursuant to an award will be 24 months.  Details of the award will be published subject to any confidential, commercially-sensitive or personal information being excluded.
10. An important point to bear in mind is that where only the party making reference to arbitration puts forward a “final” proposal, the arbitrator must make the award set out in the proposal provided that it is consistent with the principles under the Code. This provision should ensure that both parties engage with the process as otherwise the other side will ‘win’ by default.

The moratorium

11. The Bill will temporarily prevent certain remedies and measures from being exercised in relation to the ring-fenced debt, including:

• Forfeiture;
• The presentation of winding-up petitions;
• The use of measures in relation to Commercial Rent Arrears Recovery (CRAR);
• The issuance of debt proceedings for County Court or High Court Judgments;
• The right to draw down on rent deposits to cover such ring-fenced arrears;
• If a landlord has drawn down on the rent deposit and used it to cover the ring-fenced debt, the requirement for the tenant to top-up the deposit will be suspended;
• The inclusion of any ring-fenced rent debt in any CVA, restructuring plan or scheme or arrangement if the tenant in question has entered into the arbitration system, an arbitrator is appointed, or for a period of 12 months following any arbitration award.

12. The period for which these remedies will be restricted will be from the legislation coming into force until the earlier of (a) the conclusion of the arbitration process where the matter is referred to arbitration, or (b) the timeframe for an application to the arbitration system having passed without an application being made.
13. An unexpected change in the Bill is that commercial tenants will also be protected from debt claims from landlords, including County Court Judgments (CCJs), High Court Judgments (HCJs) and bankruptcy petitions, issued against them in relation to rent arrears which include a ring-fenced debt in the period from 10 November until the Bill comes into force. If a claim is issued in that period, either party may apply to the court for the proceedings to be stayed and for the matter to be resolved by the statutory arbitration process.  Where such an application is made, the court must stay the proceedings.  If Judgment on the debt claim is given in favour of the landlord, any unpaid sum (including interest) may be referred to the arbitration process and can be varied by an arbitral award.  Any Judgment debt may not be enforced by the landlord before the end of the moratorium period (which runs from the passing of the Bill to the later of the end of the 6-month arbitration referral period or the making of an arbitration award).
14. It should also be noted that the moratorium on forfeiture and restrictions to use the CRAR regime will remain in place until 25 March 2022 on any rental arrears falling outside of the definition of ring-fenced debt.
15. Subject to the above, landlords will still be able to exercise their ordinary enforcement rights in the ways they did prior to the moratorium, for example action could be taken in relation to:

• Non-payment of rental arrears incurred prior to March 2020 and from the end of the ring-fenced period onwards;
• Tenants that fall outside the scope of the arbitration legislation over the non-payment of arrears accrued at any time.

16. The Bill will not affect any settlement agreements, whether entered into before or after the Bill receiving royal assent. The Code emphasises the importance of parties seeking to negotiate and agree the position with regard to rent arrears.

Commentary

We will have to wait and see whether the Bill changes on its way to becoming legislation. Further guidance to assist arbitrators, alongside more specific guidance for landlord and tenants on the details of the Bill will be set out in the Bill once it has passed through Parliament. The overriding message from both the Bill and the Code are that parties should seek to negotiate and reach agreement on the payment of rent arrears where they can. Where tenants can afford to pay, they should pay. Where they cannot, proposals should be made and considered.  With the removal of the option of court proceedings for the protected rent arrears, parties may choose to negotiate now, rather than wait for a decision under the arbitration scheme.