COVID-19 rent arrears: details of new binding arbitration announced

On 9 November 2021, the government outlined a new draft bill to Parliament which intends to deal with outstanding COVID-19-related commercial rent arrears – the Commercial Rent (Coronavirus) Bill. The draft Bill was eagerly awaited after earlier announcements in June and August, which led to several months of uncertainty. The draft Bill was accompanied by a new and detailed Code of Practice.

In this article, commercial property litigation partners Chris Hill and Greg Barnbrook outline the details of the proposed legislation and explain its limitations.

Summary details

It is worth caveating that the Bill may of course be amended throughout the parliamentary process (or perhaps not even pass). In its current form, there are a number of key takeaways:

• The legislation will apply to rent accrued from about 21 March 2020 through to when restrictions were removed from a particular tenant’s sector. It will therefore capture rent periods when tenants were allowed to partially trade with restrictions and could arguably be quite wide. In England the period could, for example, end as late as 18 July 2021 (for nightclubs and hospitality) or 12 April 2021 (for non-essential retail).
• It will apply to businesses or premises that were required to close. It will not be available to those businesses which were not required to close (e.g. pharmacies).
• It will only cover situations where rent remains unpaid and/or the parties have not already reached an agreement about the rent. Parties are not allowed to use the scheme to reopen discussions on what rent should be paid.
• The sums falling due will include principal rent, and also service charge, insurance rent and interest due for late payment.

Arbitration process

The arbitration process will only be open to parties for a 6-month window. After that period, the scheme will close and landlords’ usual rights and remedies will be restored (i.e. landlords can sue for rent, forfeit, use Commercial Rent Arrears Recovery and so on).

However, before the application is made, the parties must have engaged in a pre-application process exchanging proposals and information and which will take approximately 28 days; tenants will have to be careful about timings in the latter part of the 6-month window to apply.

Significantly, the Bill introduces restrictions on the ability for landlords to issue a money claim at court to recover the rent. After the Bill comes into force, such claims will not be allowed to proceed and, to avoid landlords rushing in before the Bill comes into force (more than they already have), money claims issued after the announcement on 10 November 2021 will be stayed and not allowed to proceed.

This is bad news for tenants whose landlords commenced claims for rent arrears before 10 November 2021 but which are currently unresolved. It seems clear that they are not able to benefit from the scheme.

Who makes the final decision?

The arbitration process itself is admirably swift, setting out a tight, if not ambitious, timetable and outcomes are designed to be reached in relatively short order (i.e. within 1–2 months). The process forces parties to make proposals about what rent should be paid in order to narrow the range of the decision that the arbitrator will need to make (if the parties do not agree on a position).

Crucially, the arbitrator will make a decision based on the principles set out in the Code, which include an assessment of the viability of the tenant’s business (and if not deemed viable, the scheme is not available) and are also subject to any discounts not jeopardising the landlord’s solvency. These matters are to be supported by documentary evidence but: balancing assessments of the viability of a tenant’s business against whether it can afford to pay the rent without assistance from the scheme, what will or not jeopardise a landlord’s solvency and what is a fair award in all the circumstances are likely to be highly controversial areas.

Within these parameters, the arbitrator will have the power to write off (a proportion of) the rent, provide further time to pay and/or disapply interest a landlord is entitled to. There appears to be no cap on the amount of rent that an arbitrator can discount.

Other noted practices and rules during the arbitration process are:

• The maximum amount of time a tenant will be allowed to discharge arrears awarded under an award will be 24 months.
• The parties can request an oral hearing (which is to be held within 14 days of receipt of the request and last no more than 6 hours) but otherwise the arbitrator will make a decision on the papers.
• There are also provisions designed to exclude any actions taken by either party to manipulate or artificially alter their financial position, including through artificial payment of dividends and so on.

Comment

The scheme is well intentioned, and its stated purpose is to assist those situations where rent arrears continue to be outstanding. However, it must be the case that the proportion of cases that remain unresolved (either through agreement, insolvency measures or court proceedings) over 18 months after COVID-19 arrears started falling due is rather small.

Whilst the government’s accompanying statement has explained that any proceedings commenced after the announcement of the Bill (i.e. after 10 November 2021) will be stayed so that the parties will be forced to go to arbitration if they cannot agree, there was only a relatively small proportion of landlords who had allowed arrears to remain unresolved until June or August of this year.

At that stage many landlords could see the writing on the wall and therefore commenced proceedings prior to 9 November (if they had not already). This means that only those tenants who have: (a) not paid (perhaps deliberately), (b) declined to reach an agreement with their landlord (when perhaps they could), (c) have not gone through an insolvency process, and (d) whose landlord has decided (perhaps partly charitably) not to issue proceedings before 10 November, will be able to benefit from the scheme. However, that is likely to be a very small proportion of overall cases fitting a particular set of circumstances.

Conversely, there will be a great many other parties who have either been forced (through court proceedings which have confirmed that 100% of rent is due) or elected (to some degree) to pay the rent prior to 10 November who are not able to participate in the scheme, even if they would have had an equally equitable basis to do so.

Whilst there are no easy decisions in this area, this will leave a great number of tenants and landlords outside the scheme feeling aggrieved about where the chips have fallen and perhaps wish that the scheme was never conceived at all.

If you have a rent dispute with your landlord or tenant, have been unable to resolve it, need advice on your rights, remedies available and/or would like some assistance with reaching an outcome, please get in touch with Chris Hill or Greg Barnbrook using the below details.