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In review: the draft Commercial Rent (Coronavirus) Bill – rent arrears arbitration process revealed

In this update, we consider the draft Commercial Rent (Coronavirus) Bill published yesterday and in particular the proposed binding arbitration scheme for resolution of rent arrears under business tenancies.

As discussed in our update yesterday, the Government has now published draft legislation which is intended to resolve payment of the estimated £7.5bn rent arrears still due across the real estate sector. This Bill is supported by a new Code of Practice which immediately comes into force.

The new regime, if enacted as drafted, will ringfence certain “protected rent debts” and require parties to work together to agree terms for payment or, if resolution is not possible, to refer the matter to binding arbitration. In the meantime, it is proposed that the moratoria under the Coronavirus and Corporate Insolvency and Governance Acts 2020 be further extended and expanded in order to prevent landlords taking action in respect of the protected debts until either that arbitration process has been completed, or the deadline to make a reference has passed.

The main thrust of the draft Bill is to enable parties to agree relief for tenants, so that businesses remain viable going forward. However, the Bill is more balanced than the previous restrictions under the Coronavirus Act and tenants are once again reminded that, where it is affordable, they should aim to meet their rental obligations. The Government has made it clear that preservation of a tenants’ business viability should not come at the expense of a landlord’s solvency.

This note gives a summary of the provisions only – please get in touch with your usual Shoosmiths contact for more detail and to discuss the implications for your business.

1. Arrears

The “protected rent debts” are rent or service charge (including interest, VAT and insurance rents) which fell due:

a. Under a business tenancy (using the 1954 Act definition); and
b. During a period when under Covid-19 regulations the tenant was mandated to close its premises or cease trading whether in whole or part, including exceptions such as non-essential shops being allowed to open for collections, or where restrictions were eased but not entirely lifted such as requirements for cafes to restrict table booking size.

This protected period began on 21 March 2020 and continues up to the date on which restrictions were removed from that tenant’s sector – the latest date in England being 18 July 2021. It would appear that any periods during the pandemic when tenants were permitted to re-open before being required to close again as new regulations were introduced will be treated as part of the overarching protected period. An annex to the updated Code sets out the relevant dates across various sectors, reducing the scope for argument between the parties.

Businesses which were able to continue trading throughout the pandemic (such as supermarkets or pharmacies) are not within the scope of the legislation.

Any debts which fall outside this definition remain payable in full, although it is important to note that that the current restrictions on forfeiture and Commercial Rent Arrears Recovery (“CRAR”) still remain in place until 25 March 2022, as do the restrictions on statutory demands and winding up petitions in relation to arrears incurred under business tenancies unpaid due to the pandemic.

2. Process

If the tenant can show that its arrears are “protected rent debts”, the next stage is to consider whether the tenant should be given relief and, if so, what relief. This can be negotiated and settled between the parties, or referred to binding arbitration either to:

a. Write off the whole or any part of the debt;
b. Give time to pay the whole or any part of the debt, including by allowing payment in instalments; and/or
c. Reducing (including to zero) any interest due.

Either party can refer the matter to arbitration and must include a formal proposal for resolving the matter plus supporting evidence. The other party must be notified in advance of the proposed reference, to allow them time to prepare a response. Effectively, the party making the reference needs to show that there has either been engagement between the parties to try and resolve the arrears position which has not ended in agreement, or that they have sought to engage and the other party hasn’t.

The window for a reference to arbitration is currently six months from the date the Act is passed – although this can be extended by the Secretary of State. This window is also the moratorium period during which landlords will be unable to take other enforcement action, unless a reference is made, which will therefore extend the March 2022 restrictions on CRAR and forfeiture.

3. Arbitration awards

The arbitrator will first assess the viability of the tenant’s business and must dismiss the reference if they determine that the business is not viable and would not be viable even if relief was awarded.

If the business is or would become viable if relief was awarded, the arbitrator will then consider the proposals put forward by each side and must make the award that is most consistent with the principles in the Bill (or, if no proposal is consistent, come to their own decision). Those principles include:

a. That any award should be aimed at preserving, or restoring and preserving, the viability of the business of the tenant (so far as that is consistent with preserving the landlord’s solvency), and that the tenant should, so far as consistent, be required to meet its obligations as regards the payment of protected rent in full and without delay.

b. Disregarding anything done by either party with a view to manipulating their financial affairs so as to improve their position.

c. Where appropriate, having regard to:

  • the assets and liabilities of the landlord/tenant, including under any other tenancies;
  • the previous rental payments made under the business tenancy from the tenant to the landlord;
  • the impact of coronavirus on the business of the tenant; and
  • any other information relating to the financial position of the parties.

d. Disregarding the possibility of either party borrowing money or restructuring its business.

There is no specific reference in these principles taking into account the conduct of the parties, and although mentioned in the Government’s consultation, there is no power in the Bill for arbitrators to extend or reduce the contractual term of the lease or to impose other changes to that agreement. The power seems to be limited purely to financial solutions, and the assessment purely based on financials too – not on how a particular property has been affected for those tenants with property portfolios.

The Secretary of State will approve bodies to maintain lists of suitable and impartial arbitrators. From the principles to be considered, it seems likely that appropriate arbitrators will be financial (rather than property) experts.

One other plus for landlords – after an arbitrator has been appointed, ringfenced rent cannot be included in any CVA, restructuring plan or scheme of arrangement and that restriction remains in place for 12 months after an award has been made. We await with interest to see whether proposals instead land before referrals are made to arbitration.

4. Other methods of enforcement

Landlords are now wearily used to the restrictions on their ability to effect forfeiture and CRAR, but there have been several high-profile cases (many of which Shoosmiths have been involved in) which have sought payment through the issue of court proceedings – with judgment in favour of landlords given that the courts have held that legally, tenants remain liable for rent under their leases. This decision is currently subject to appeal in at least two cases, so this balance could change.

Going forward however, before issuing proceedings landlords will need to consider whether rent is a protected debt. If so, as well as the restrictions on forfeiture, CRAR and the issue of winding up and bankruptcy petitions under CIGA, landlords will also be prevented from:

a. drawing down on or requiring “top-ups” of tenancy deposits; and
b. issuing debt claims for County or High Court judgments.

In short summary, if an application is made then the court must stay claims issued between today and the date the Act is passed which relate to protected debts, in order to resolve the issue (whether by arbitration or otherwise). Any judgment in current proceedings passed on or after 10 November 2021 can still be referred back to arbitration for relief. In the meantime, and during the six-month moratorium, the judgment debt cannot be enforced.

Where a judgement is entered that relates solely to the protected rent debt and relief from payment has been agreed or awarded, once this is brought to the court’s attention the office must request that it is taken off the register. However, the judgement will sit on the tenant’s credit history in the meantime, which can often impede the ability to obtain further credit or the ability to enter supply contracts. Practically then, this is of little benefit as removal of the judgment will take too much time.

At present, it does not appear there is an ability under the Bill to stay proceedings that have already been issued by landlords. This may be intentional or, if not, it may be altered when the Bill passes through Parliament.

The provisions are very detailed and therefore if you wish to discuss these further, please give one of the Shoosmiths contacts a call.

Comment

Acting as an adviser to both landlords and tenants Shoosmiths has seen both sides of this commercial impasse, so the new scheme comes as some relief to both sides. Tenants should now be able to better plan cashflow and will have the comfort that any ringfenced arrears remain protected for now which will help ensure business viability; whilst for landlords the ringfence represents ‘damage limitation’ and certainty that rents going forward will be payable in full.

On the other hand, those ringfenced arrears remain elusive and the further six-month moratorium means landlords may be left reliant on incurring further time and costs and forcing arbitration in order to obtain payment, even in part.

Kirsty Black, Property Litigation partner, comments “The provisions of the Bill are more substantial than I anticipated but there are gaps and discrepancies which some parties will no doubt seek to exploit which is only going to increase costs further which sets the parties to these disputes further apart. We have acted for so many landlords and tenants since the pandemic hit which have come to commercial agreements to preserve an ongoing relationship. The Code has always had this at its heart and continues to do so and most will prefer this than the time, costs and complexities of the proposed arbitration scheme”

Nathan Rees, Real Estate partner, adds that “bringing parties to the negotiating table and seeking to draw to a close outstanding debt issues will be, in most cases, a step in the right direction to allow parties to move forward from the chaos of the pandemic. By preserving those agreements which so many of our clients entered into voluntarily, the Bill rewards those parties who have cooperated and reached a compromise through negotiation. Our hope must be that this process will lead to the “debt pile” of arrears being reduced in a fair and balanced fashion, so that when enforcement remedies become available once more, fewer parties find it necessary to resort to such action and that the market is able to move back towards a more normal operating position”.

Expect much more analysis to follow as we all navigate the new system...

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2022.

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