The Commercial Rent (Coronavirus) Bill – a new legal process for COVID-19 rent arrears
As mentioned in our recent update, the Government has now set out how it will require commercial landlords and tenants to resolve rent arrears disputes arising from the COVID-19 pandemic. Frustratingly (but perhaps unsurprisingly) for landlords, alternative enforcement options for pandemic-related arrears have effectively now been removed altogether, leaving only arbitration.
The Commercial Rent (Coronavirus) Bill sets out the proposed new arbitration procedure and further restrictions. It is expected to become law by 25 March 2022. There is also a new, wider, Code of Practice that applies now.
In this article, we summarise the new regime and its implications for landlords and tenants.
What debts are affected?
Ring-fencing does not cover all rent disputes. It will be limited to tenants who occupied premises for business purposes and who due to the pandemic were required by Government regulations to close (fully or in part) for a period between 21 March 2020 and no later than 18 July 2021. Tenants who were never forced to close will not be protected.
If those tests are satisfied, any unpaid principal rent, service charge, insurance rent and late payment interest will be ring-fenced for the period during which the tenant was subject to restrictions on its specific operations (the ‘protected period’). For most retail tenants, this will catch arrears from 21 March 2020 to 12 April 2021 and for hospitality tenants from 21 March 2020 to 18 July 2021. These debts will be protected from any action except the new arbitration process.
For all other periods, rent must be paid in full even if the tenant chose not to re-open. Landlords can pursue those debts now.
What will the arbitration process be?
The Bill sets out a streamlined, prescribed arbitration process:
- a 14-day pre-action process consisting of a notification letter and counterproposal;
- referral by either party to arbitration and appointment of an arbitrator;
- submission of proposals for resolution with supporting evidence and an opportunity to revise them;
- a hearing if the parties request it; and
- a written, binding arbitration award.
The arbitrator will have limited discretion and must first assess if the tenant’s business is viable. If it is, the arbitrator must then assess which settlement proposal is most consistent with the principles that (i) the viability of the tenant’s business should be preserved (provided the landlord would remain solvent); but (ii) the tenant should meet its obligations in full and without delay where possible.
The whole process is intended to take no more than 2-3 months unless the parties agree to extend time. It is also intended to be temporary. Parties will only have six months from the date the Bill becomes law to make arbitration referrals. The intention therefore seems to be that it will be ‘business as usual’ for the landlord/tenant relationship from around October 2022.
Can you avoid arbitration for ring-fenced arrears?
Only by agreement. Referrals to arbitration will be voluntary, but if one party makes a referral within the six-month referral period and the arrears are ring-fenced, the other party will be bound.
However, you can still seek to resolve your dispute amicably. Settlements concluded before the Bill becomes law will not be affected and can still be enforced. Parties are expected to try to reach agreement before the arbitration process takes effect and encouraged to consider mediation.
What other restrictions are being imposed?
Landlord remedies will be further restricted while arbitration is ongoing. Once the Bill becomes law, landlords will be prohibited from drawing down on rent deposits or pursuing debt claims, bankruptcy petitions, CRAR or forfeiture for non-payment in relation to ring-fenced arrears until the arbitration process has been completed or the deadline for referral to arbitration has passed.
Many of these options (aside from forfeiture) are technically still available for now, but in reality they are no longer useful. After the Bill becomes law, either party will be able to obtain an automatic stay of debt proceedings relating to ring-fenced arrears issued on or after 10 November 2021, and any new judgments obtained from now on will be open to challenge by arbitration. Court action therefore risks being a waste of costs. Tenants will also not be obliged to top up deposits drawn down to cover ring-fenced arrears until after the arbitration period ends, so drawing down now risks weakening the deposit until at least October 2022.
Court proceedings started before 10 November 2021 are not affected, but the Bill’s scope may be widened as it passes through Parliament.
What is the impact of the Code of Practice?
The arbitration procedure and additional restrictions are not yet law, but the Code of Practice already applies. Importantly, it covers all rent disputes, not just ring-fenced arrears. Its key message is that landlords are expected to share the pain in order to preserve viable businesses, but concessions should be linked to affordability, with tenants paying what they can afford, as soon as they can afford it. Tenants who have the means to pay in full should do so now.
Although it is not mandatory, the Code is the Government’s ‘best practice’ for commercial arrears disputes, so parties who do not follow it may be at greater risk on costs in any future action, whether arbitration or otherwise. All parties should therefore consider complying with the Code as far as possible.
Parties are expected to negotiate, act reasonably and attempt to show ‘transparency and collaboration’, while considering affordability for both parties over a period of up to two years. Tenants are required to produce evidence of their financial position to support any request for a waiver or deferral of arrears, and that evidence should then be used to formulate an affordable concession that protects the tenant’s business but does not bankrupt the landlord.
The Bill and the Code largely tip the balance even more in favour of tenants by restricting landlord action further and emphasising that concessions are expected, though landlords can take some comfort from the clear requirement for tenants to prove they have a financial need for relief.
While the Bill goes through Parliament, landlords and tenants would be prudent to keep the Code in mind in all arrears discussions. The potential costs and risk of arbitration should also now be factored into assessments of settlement proposals.
If you have any questions arising from this article or would like to discuss the impact of the new ring-fencing procedure on your business, please contact Simon Painter in BDB Pitmans’ property litigation team.