Many businesses across the UK were forced to close as a result of COVID-19 mandated shutdowns imposed for large portions of 2020 and 2021. As a result, these businesses faced a sharp reduction in revenues and, in many cases, have since been unable to pay their rent and have fallen into rental arrears. The Commercial Rent (Coronavirus) Bill 2020 (the Bill) introduces a statutory procedure in which certain disputes regarding commercial rental arrears must now be conducted. The Bill is currently (as of January 2022) passing through the House of Lords, and is expected to be passed into law by 25 March 2022.
If passed in its current form, the Bill will ‘ring-fence’ COVID-19 related commercial rental arrears and establish a binding arbitration system that landlords and tenants will be required to participate in if they cannot come to a settlement regarding those arrears.
The UK Government has published a new Code of Practice for Commercial Property Relationships (the Code), which is intended to offer guidance on how parties should resolve COVID-19 related commercial rent disputes, and provide further guidance on how the statutory arbitration process will operate. As parties who operate in this sector will be aware, there are a number of temporary measures currently in place restricting a landlord’s ability to make use of the debt recovery mechanisms which would otherwise have been available to them. These temporary measures have, among other things, restricted the ability of landlords to forfeit a lease for non-payment of rent, and restricted the use of Commercial Rent Arrears Recovery (CRAR).
This left most landlords with limited viable options in which to pursue and recover their debt. The most utilised in this period was the commencement of debt proceedings in the county or high courts. The Bill, once enacted, will replace these temporary measures and utilisation of the court process with a new statutory process that must be followed in conducting disputes included in the scope of the Bill.
When does the Commercial Rent (Coronavirus) Bill apply?
The provisions of the Bill will only apply to certain commercial rental arrears incurred as a result of COVID-19 mandated closures. These must meet the following requirements:
- The provisions of the Bill apply only to business tenancies, typically where an individual or company leases a premises for the purposes of carrying on a business. However, it currently appears as though certain types of business tenancies, for example, premises held under a license or under a tenancy for six months or less, will be exempt from the provisions of the Bill. This is an area that may warrant more detailed consideration once the Bill is passed.
- The provisions of the Bill will only apply in relation to disputes over a ‘protected rent debt’.
- ‘Rent’ is defined to include rent as it is commonly understood, that is, an amount payable by the tenant to the landlord under the tenancy for possession and use of the premises, but also includes VAT on that amount, any service charge payable under the tenancy, and interest on either of those amounts.
- Rental arrears are considered a ‘protected rent debt’ accrued by a business during a period in which it was subject to COVID-19 related closure requirements. The provisions of this Bill will therefore not apply to rent that has already been paid, or to rental arrears incurred by tenants whose businesses were not forced to close.
- If the debt is subject to the provisions of the Bill, these provisions will apply differently depending on the date on which the claim was brought.
The Bill in its current form will not apply to court claims or other legal proceedings raised prior to 10 November 2021. Such claims and proceedings will, however, continue to be subject to the temporary measures that restrict landlords’ usual remedies until those temporary measures are repealed.
The Bill may apply retrospectively to some claims raised after 10 November 2021, but before the Bill is passed. If a landlord brings a claim which relates to a protected rent debt against a tenant during this period, either party may apply to the Court to have the proceedings paused until the matter is resolved (whether by the statutory arbitration process or otherwise) and the Court will be bound to accept this application. Landlords who have brought such a claim in this period should also be aware that, even if they have already received a judgment in their favour, if the debt remains unpaid their claim may still be referred to arbitration, and they may be unable to enforce the judgment during the moratorium period.
If passed in its current form, the Bill will impose a moratorium which will prevent landlords from taking certain actions during the moratorium period. The length of the moratorium period will depend on whether the dispute is referred to arbitration under the provisions of the Bill. If the claim is not referred to arbitration, the moratorium period will run from the date on which the Bill is passed until six months from that date. The parties will be able to refer the claim to arbitration at any point within this period. If the claim is referred to arbitration, the moratorium period will run from the date on which the Bill is passed until that arbitration has concluded. During the moratorium period, the landlord will be barred from exercising a number of debt recovery mechanisms in relation to the protected rent debt, including starting a debt claim, and using CRAR in relation to the protected rent debt.
These provisions are intended to restrict the landlord’s options in relation to a protected rent debt and thereby either force parties to the negotiating table or, failing that, into the statutory arbitration procedure.
How does the arbitration process work?
The Bill, supplemented by the guidance of the new Code, sets out a statutory procedure for arbitration of protected rent debts. This statutory arbitration will operate in a broadly similar manner to standard arbitration, albeit with a few provisions intended to tailor the process to the specific context in which it will operate.
In order to begin the process, a landlord or tenant involved in a dispute over a protected rent debt must notify the other party of their intention to apply for arbitration. The parties will then be subject to set time limits within which they can engage in pre-action negotiation by exchanging formal letters setting out their position and their rebuttals of the opposing parties’ position. Either party can then make a formal application for arbitration. This application must show that the other party has been properly notified and must also include a formal proposal for resolving the dispute.
The arbitrator will then consider the merits of the application. In considering the merits of the application the arbitrator must have regard to a number of factors. In order to accept an application, the arbitrator must be satisfied that the tenancy meets the definition of a business tenancy, and that the sum in dispute meets the definition of a protected rent debt, as set out above. The arbitrator is bound to dismiss a referral if they consider that the tenant’s business is not viable, and would not be viable even if the tenant were to be given relief from payment. In assessing viability, the arbitrator will consider the assets and liabilities of the tenant, previous rental payments made under the business tenancy, and any other information relating to the financial position of the tenant that the arbitrator considers appropriate. If the arbitrator, having considered these factors, decides that the dispute is eligible they will accept the dispute for arbitration.
Parties will then have a set amount of time within which to submit their final proposals, which will set out that party’s case and suggested remedy and include evidence supporting their positions. The arbitrator will also have the opportunity to request further information from the parties. At this point, the parties will then either agree that the arbitrator is entitled to rule on the dispute based on the information already provided or, if they consider it necessary, can request a hearing. Hearings are expected to last no longer than six hours and are expected to be conducted in an inquisitorial rather than adversarial manner.
Having now had the opportunity to consider all information and evidence that has been put forward, the arbitrator will come to a decision which is legally binding on the parties. The arbitral award can then be enforced in the same manner as a judgment or order of the court.
The arbitrator’s decision can be challenged on any of the three standard bases for challenging an arbitral award, namely: that the award was made without jurisdiction, that there has been a serious irregularity that has caused or will cause substantial injustice to the applicant, or that the arbitrator has erred on a point of law.
How will the Bill affect landlords and commercial tenants?
Although a number of the temporary measures which restrict a landlord’s ability to recover rental arrears will be repealed upon the assent of this Bill, in many cases these temporary measures will be replaced with a moratorium and mandatory arbitration procedure which will prove equally restrictive, or possibly even more so.
As has been clear since this Bill was announced, these provisions are intended to ensure that otherwise viable businesses are not forced into insolvency as a result of COVID-19 related closure requirements. While the provisions of the Bill may, on the face of it, seem to award a great deal of power to commercial tenants, there are a number of conditions which limit the protections of the Bill to a specific type of commercial tenant. The definitions of ‘business tenancy’ and ‘protected rent debt’ will exclude many commercial tenants who did not ‘feel the pinch’ of the COVID-19 related closures to the same extent as others.
The definition of ‘protected rent debt’ limits the protections of the Bill to rental arrears which were accrued when the business was closed. Some may argue that this doesn’t go far enough; the pandemic has affected the revenues and footfall of many businesses beyond the point at which those businesses were actually shut, and many commercial tenants would argue that the Bill should also provide protection for rental arrears accrued as a result of these losses.
Furthermore, the express requirement for an arbitrator to consider the viability of the commercial tenant’s business, and the thorough financial examination that this will entail, may exclude a number of commercial tenants from the protections of the Bill, and indeed may highlight financial issues of which landlords were otherwise unaware.
While the Bill’s provisions may be less far reaching than they initially seem, the main impact of the Bill will likely be to foster a culture in which commercial landlords and tenants will be more likely to negotiate a settlement of rental arrears that have accrued during the pandemic. Landlords may realise that it will be cheaper in the long run to forego a certain level of arrears rather than spend the time and money on pursuing the full amount through a statutory arbitration. Indeed, on the other hand, tenants may, upon considering the strict conditions implicit in these provisions, consider that it is preferable to pay a bit more of the arrears than to take the risk of claiming full relief through this process.
It should also be noted that, while the provisions of the Bill only apply to specific protected rent debts, the Code provides guidance for commercial landlords and tenants engaged in disputes over all types of commercial rent debts incurred throughout the pandemic. We can therefore see that the Bill and supplemental Code may lead to a wider cultural shift and thus have an influence which extends far beyond the new statutory process itself.
With additional reporting by Ross Simpson.