Covid-related commercial rent arrears – what can landlords and tenants do now?

The Commercial Rent Arrears (Coronavirus) Act 2022 (the ‘Act’) received Royal Assent on 24 March 2022 and save for some specific provisions relating to insolvency matters, the Act is now in force.

We considered the potential implications of the Act here when it was first published as a Bill in November 2021.

The Act made its way through Parliament with few amendments and the key points to note for landlords and tenants are:

Forfeiture for non-payment of rent

• Landlords are once again entitled to forfeit commercial leases by peaceable re-entry for non-payment of rent for arrears that fall outside the Ringfenced Period relevant to their business sector (see below), as long as they have not expressly waived the right to do so. This includes sums which fell due prior to 21 March 2020 and remain outstanding. This will be welcome news to many landlords;
• However, landlords will need to be careful to check they have sufficient arrears to forfeit, as any payments tenants have made since the end of their Ringfenced Period have to be allocated to non-ringfenced arrears first, even if they were originally allocated in another way; and
• Relief from forfeiture is also impacted, as ringfenced arrears will not count in a court’s assessment of whether a tenant should be granted relief.

Arbitration scheme

• Commercial tenants in England whose businesses were subject to specific coronavirus restrictions (including but not limited to closure requirements) benefit from the ringfencing of rent arrears for the period 21 March 2020 to either 12 April 2021 (non-essential retail) or 18 July 2021 (hospitality) – the ‘Ringfenced Period’. The relevant date in Wales is (in broad terms) 7 August 2021 for all businesses. Arrears of rent and other charges under the lease falling within the Ringfenced Period can only be pursued through the new Arbitration Scheme and not by any other measure;
• Where landlords and tenants have been unable to reach agreement in respect of any sums to be paid for the Ringfenced Period, it is now open to either party to make a reference to arbitration under the Act to determine whether the tenant should be entitled to relief from payment of unpaid rent arrears accrued during the Ringfenced Period (and, if so, what relief should be granted); and
• A reference must currently be made within six months of the Act coming into force (ie by 24 September 2022), though the Government does have the option to extend that date later. Once the deadline passes, if no reference has been made to arbitration then all of the landlord’s rights and remedies will be reinstated and can be exercised in the usual way, including the right to forfeit for non-payment of rent.

Arbitration process

The arbitration steps are as follows:

1. The referring party must give the other party notice of its intention to refer the arrears to arbitration and allow a period of 28 days following the giving of such notice before a reference can be made. This effectively means that no references to arbitration can be made until around 25 April 2022 at the earliest;
2. A reference must then be made to an approved arbitration body which will then appoint the relevant arbitrator (or arbitrators, if the parties agree to have more than one). This is a departure from the norm as the parties have no power to agree the identity of the arbitrator(s). It is more akin to the court process where a judge is appointed by the court with no input from the parties. This is presumably to ensure the independence of the arbitrator, but does leave open a risk of having an arbitrator who isn’t a specialist in the types of business involved in the arbitration (both landlord and tenant). The Government has promised to clarify who the arbitration bodies and arbitrators will be in the next three to four weeks;
3. In the reference, the applicant must put forward a proposal for dealing with the ringfenced arrears. The responding party then has a right to put forward its own proposal to the arbitrator. Proposals must be supported by evidence as to the reasons for relief being sought and the financial status of the party concerned;
4. The arbitrator first has to determine if the parties have already reached a binding agreement regarding rent for the Ringfenced Period. If they have, the reference must be dismissed;
5. The arbitrator must then assess the tenant’s business and must dismiss the reference if it is determined that it is not viable and would not be viable even if it were granted relief from payment of ringfenced rent. The test for viability falls outside the scope of this note but will largely be based on the tenant’s evidence of its recent financial history and prospects. For further details of the viability test, please see here.
6. If the arbitration proceeds, the arbitrator appears to be limited to a binary choice between which of the landlord’s or tenant’s proposals is to be preferred. There seems to be only very limited scope for the arbitrator to exercise an element of discretion and only in circumstances where the arbitrator does not have a proposal that is compliant with the Act. Great care will therefore need to be taken by both landlords and tenants in formulating reasonable and workable proposals supported by sufficient evidence; and
7. The process is intended to be relatively swift and in most cases the decision is to be made on paper, although it is open to either party to request an oral hearing. If an oral hearing is requested the arbitrator is compelled to hold an oral hearing (ostensibly within 14 days though we consider it likely that timescale will slip in many cases) and it must be held in public unless the parties agree otherwise.

Approved arbitration bodies and fees

• As at the date of writing, the list of approved arbitration bodies has not been published and it is therefore as yet an unknown as to who the likely arbitrators might be, or what their fees will be. The Act requires such fees to be publicised, so the position should be clearer once the arbitration bodies are announced;
• The party making the referral must pay the arbitration fees in advance of the arbitration taking place, although there is scope for the arbitrator to require the non-referring party to reimburse the referring party a proportion of those fees. That is not, however, guaranteed; and
• If a party requests an oral hearing, that party will similarly be responsible for paying the fees for the hearing in advance, with scope to recover a proportion of those fees from the other party when the arbitrator makes his/her award.

Costs

Neither party is entitled to recover its legal or other costs of the arbitration (other than in respect of the arbitration fees referred to above). Costs recovery clauses in leases do not apply to costs of the arbitration.

Conclusion

• The Act provides a welcome timeframe for resolution of ringfenced arrears;
• However, both landlords and tenants should think carefully before launching a reference to arbitration given the inability to recover costs and the uncertainty of the outcome; and
• It should be remembered that there is nothing in the Act which prevents the parties from continuing to negotiate and/or mediate, albeit with an eye on the six month time limit for arbitration, as, if successful, alternative dispute resolution is likely to prove more cost-effective than arbitration.

If you have any questions arising from this article or would like to discuss the impact of the Act and/or the arbitration scheme on your business, please contact Aoife Murphy in BDB Pitmans’ property litigation team.