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Resolving remaining COVID-19 commercial rent debts – who pays and how much?

In June this year the government announced that new rules would be introduced to ring-fence COVID-19 commercial rent arrears and to introduce a binding arbitration process to resolve disputes where agreement cannot be reached. This was followed up by a more detailed policy statement in August. Then, after much anticipation, on 9 November BEIS issued:

To provide the time to introduce and pass legislation, the current moratorium on forfeiture and restrictions on the use of the Commercial Rent Arrears Recovery (CRAR) regime remain in place until 25 March 2022 (being the anticipated date that the Bill will come into force), unless legislation is passed ahead of this.

The government’s intention is that, where possible, rent debt accrued as a result of the pandemic should not force an otherwise viable business to cease operating. We consider the viability assessment in more detail below.

The purpose of the Bill

The stated aim of the Bill is to support the resolution of commercial rent debt accrued during the COVID-19 pandemic. Once the Bill becomes law, it will introduce a system of legally binding arbitration for England and Wales. It is currently expected to come into force from 25 March 2022. The Bill will apply in respect of:

  • unpaid rent arrears relating to the ring-fenced period during which tenants were mandated to close their premises or cease trading (in whole or in part) during the COVID-19 pandemic; and
  • tenants who lease their premises under a business tenancy.

The ring-fenced period is from 21 March 2020 until the last date restrictions were removed from the relevant business tenant’s sector. So that will be until the earlier of (a) 18 July 2021 and (b) the last day on which the relevant tenant’s business was subject to restrictions. This will vary from sector to sector, a full list of dates is set out in Annex A of the new Code.

The detail of the new arbitration process is covered below. Other key points to note from the Bill include:

  • The scheme will apply to all amounts due under business tenancies during the ring-fenced period including rent, service charge, insurance and interest – debts accrued at other times are not in scope.
  • The Bill will prevent certain remedies and measures (including forfeiture and CRAR) from being exercised in relation to the ring-fenced debt from commencement of the Bill until (a) a settlement has been reached, or (b) the date six months after commencement of the Bill, if an application for arbitration has not been made by that date.
  • The Bill will prevent landlords from issuing debt proceedings to enforce any ring-fenced rent debt whilst arbitration is available (6 months from commencement of the Bill) or ongoing. This is not restricted to actions against tenants, guarantors will also benefit from this moratorium on proceedings. The Court is obliged to stay any proceedings issued after 10 November 2021 (but before the Bill is passed) if either party apply for this. Further any part of such a judgment obtained on or after 10 November cannot be enforced during this moratorium period.
  • Landlords will be prevented from drawing down on tenancy deposits to cover outstanding ring-fenced arrears.

The new Code of Practice

The new Code is intended to govern negotiations between landlords and tenants pending the draft Bill coming into force and to provide a framework for the new arbitration process once the legislation is passed, to be read alongside the key provisions in the Bill. The Code applies to all commercial leases held by businesses which have built up rent arrears due to an inability to pay, as a result of the impact of the pandemic. It is not binding but parties are strongly encouraged to adhere to it. The hope is that the Code will encourage outstanding debts to be settled before the arbitration process comes into force; arbitration is seen as a last resort.

Headline points from the new Code:

  • Where it is affordable, a tenant should aim to meet their obligations under their lease in full. Any relief given should be no greater than necessary.
  • Tenants who are unable to pay in full should, in the first instance, negotiate with their landlord in the expectation that the landlord will share the burden where they are able to do so. Note that landlords sharing the burden is expected.
  • The preservation of the tenant business’ viability should not come at the expense of the landlord’s solvency – however tenants should never have to take on more debt or restructure their business in order to pay their rent.
  • Negotiation is encouraged - where parties reach a legally binding agreement, the arbitration process will not override this. If agreement cannot be reached alternative methods such as third party mediators should be considered.
  • Where a landlord and tenant are unable to reach agreement by negotiation, they may be able to apply for the new binding arbitration process. However negotiation is encouraged even once arbitration has begun.

The binding arbitration process – how will it work?

  • After the Bill is passed there will be a six-month application window for parties to apply for arbitration – so until 25 September 2022, if the legislation is enacted on time. This may be extended by the Secretary of State.
  • Before the arbitration proceeds, the arbitrator must assess the viability of the tenant’s business, and if it is determined that the business (a) is not viable, and (b) would not be viable even if the tenant were to be given relief from payment of any kind, the arbitrator must make an award dismissing the reference. There are criteria for assessing ‘viability’ and ‘solvency’ in clause 16 of the Bill. These include assessments of the tenant’s assets and liabilities, any other tenancies the tenant may have, and any financial information the arbitrator considers appropriate.
  • The arbitrator needs to follow a set of principles contained in clause 15 of the Bill (Arbitrator’s principles). These state that any award should be aimed at preserving the viability of the business of the tenant, so far as that is consistent with preserving the landlord’s solvency, and that otherwise the tenant should be required to meet its payment obligations in full and without delay.
  • The binding arbitration process will have prescribed stages and timeframes, a helpful visual representation of this is set out in Annex C of the Code.
  • A reference to arbitration can be made by either the landlord or the tenant (there is no suggestion that applications can be made by guarantors) and must include a formal proposal for resolving the matter which must be supported by evidence, the counterparty will have 14 days to submit its own proposal. The parties can agree to a hearing (either public if either party requests it or private) or for the arbitrator to reach their decision based on the information provided. The arbitrator has up to 14 days from a hearing, or as soon as reasonably practicable if not, to consider the evidence and come to a decision which will be legally binding. The arbitrator’s award must be published (but any confidential information can be redacted).
  • Where both parties put forward final proposals the arbitrator must make the award which is most consistent with the Arbitrator’s principles. If only one party puts forward a final proposal, the arbitrator must make that award if it is consistent with the Arbitrator’s principles. Otherwise the arbitrator can make whatever award it considers appropriate.
  • The arbitration award may give relief from the debt or state that no relief is to be given. It can write off the whole or part of the debt. The tenant may be given time to pay – up to a maximum of 24 months – and allowed to pay in instalments. Interest can be reduced or written off.
  • Fees payable for arbitration will be set by the approved arbitration bodies and payable in advance by the person making the reference. If successful part of the fees will be recoverable from the other party. The Secretary of State will have power to set limits of fees.
  • Arbitration bodies will have to demonstrate that they are competent to supply arbitration dispute resolution services. This competency will be assessed by BEIS. A list of approved arbitrators will be published in due course. Any application will be made directly to the chosen arbitrator.
  • Lenders are expected to continue to demonstrate forbearance to their borrowers during the period in which arbitration is in effect.

It is also worth noting that the new arbitration process cannot be used where the tenant that owes a protected rent debt is subject to, in respect of the protected rent debt, (i) an approved CVA; (ii) an individual voluntary arrangement or (iii) a sanctioned compromise or arrangement. Tenants that have entered the arbitration system may not include the ring-fenced rent debt in any CVA, restructuring plan or scheme of arrangement after an arbitrator is appointed and for a period of 12 months, beginning when the arbitration settlement is awarded.

Our thoughts

For those landlords and tenants who have not yet been able to reach agreement in relation to COVID-19 related arrears the prospect of binding arbitration will no doubt encourage the parties to try and reach agreement before the Bill becomes law. As will the immediate introduction from 10 November of protection for tenants from landlord debt claims for rent arrears. So it remains to be seen how broadly the legislation will apply once it comes into force – the incentive is there to reach agreement (so far as possible) in advance.

The arbitration process depends on the arbitrator making an assessment of the viability of the tenant’s business – if the arbitrator doesn’t consider that there is a viable business then it must dismiss the reference for arbitration. This is because the whole intention behind the legislation is that, where possible, rent debt accrued as a result of the pandemic should not force an otherwise viable business to cease operating. Much will depend on the arbitrator’s view. And if the arbitrator determines that the tenant’s business is not viable where does this leave the tenant? There is no detail in the Bill of any right to appeal either a decision that a business is not viable, or an award.

Questions also still remain regarding precisely what information the arbitrator will take into account – for example will previous offers made and the stance taken by each party in relation to negotiations be considered?

Whilst reactions to the detail may be mixed, the draft legislation is broadly what we were led to expect and it introduces a timeline to finally draw a line under the resolution of remaining COVID-19 commercial rent debts. This will be welcomed by the majority, even if the content of any individual arbitration award is not!