Commercial Rent Arrears - The Government sets out new legislation for binding arbitration and ringfencing scheme

This article explores the provisions of the Commercial Rent (Coronavirus) Bill which recently had its second reading in the House of Commons and is now in the Committee Stage. If the legislation is passed, it will introduce a binding arbitration scheme. Landlords and tenants will be able to unilaterally refer a rent arrears dispute to the scheme and the rent debts will be ringfenced. Whether the arbitration scheme will resolve the growing issue of commercial rent arrears remains to be seen.

Introduction

The UK Government has taken several steps to protect viable business tenants during the Covid-19 pandemic. Our paper on Commercial Leases and Covid-19 addressed the various statutory protections that the Government had enacted via the Coronavirus Act 2020 and advised landlords and tenants of their rights in light of the new legislation.

The Government have recognised that the level of commercial rent arrears is a serious ongoing problem. The Government released a policy statement in August 2021 entitled “Supporting businesses with commercial rent debts”. Alongside the policy statement, the Government confirmed that they had extended the moratorium on the eviction of commercial tenants to 25 March 2022 and extended the required amount of arrears for CRAR to be used to 554 days’ rent unpaid.

The policy statement was also an opportunity for the Government to set out their future legislative intentions in relation to unpaid commercial rents. On 9 November 2021 these intentions were realised with the introduction into Parliament of the Commercial Rent (Coronavirus) Bill (“the Bill”). The Bill was accompanied by a new Code of practice for commercial property relationships following the COVID-19 pandemic (“the Code”) which comes into effect immediately.

The current draft of the Bill creates a binding statutory arbitration process for landlords and tenants and also ringfences the commercial rent debt of businesses that have been forced to close during the pandemic.

The Code replaces an earlier code of practice that was introduced in June 2020. It is intended to help landlords and tenants resolve disputes specifically relating to rental arrears that have accrued as a result of the Covid-19 pandemic. Unlike the binding arbitration scheme, the Code applies to all commercial leases where rental arrears have built up during the pandemic due to enforced closures or because restrictions have impacted the business. Therefore, the Code is relevant for businesses in the leisure, hospitality, retail, food, drink, industrial and other industries that may have been impacted by restrictions or supply chain issues.

Despite the recent relaxing of restrictions and lockdown rules in the UK, many industries are still suffering, and some commercial tenants have significant levels of unpaid rent. Remit Consulting estimated that by 30 March 2021, £5.3 billion of commercial rents arising since March 2020 were unpaid, of which half (£2.8 billion) were in the retail sector. The British Property Federation (BPF) estimated that by 30 June 2021, £7.5 billion of commercial rent was in arrears. This number likely to be much higher now and with a new variant of Covid-19, businesses could once again be facing enforced closures and difficulties with rent payments.

The Bill – Binding Arbitration and Ringfencing Scheme

If the Bill is passed, the Government intend it to become effective from 15 March 2022. The Bill will apply to tenants who occupy a premises under a business tenancy that were forced to close their premises (in whole or in part) or cease trading as a result of a government mandate. The ringfencing scheme will only protect those unpaid rental arrears that accrued during a defined ringfenced period. Furthermore, it is only those rental arrears incurred during that defined period that will be capable of being referred to the arbitration scheme.

The binding arbitration scheme therefore applies if:

The tenant was mandated to close their premises (partly or fully) or cease trading;
The tenant occupied a property under a business tenancy (as defined in Landlord and Tenant Act 1954); and
The rent debt accrued during the “ringfenced period” (i.e. when business were mandated to close by the government from 21 May 2020 – the last date that restrictions were removed from the tenant’s relevant sector).

Business tenants operating solely out of offices that have withheld rental payments will generally be outside of the scope of the Bill. This is because the guidance from the government for service based office workers to “work from home” was clearly not a mandatory order to those businesses to close their offices. The Government has adopted a relatively strict interpretation here, limiting the pool of potential tenants who can benefit from the scheme. Nonetheless, the moratorium on forfeiture and Commercial Rent Arrears Recovery is still in force until 25 March 2022. In addition, the restriction on winding up petitions in relation to rental arrears is in force until 31 March 2022. It will therefore be vital for landlords and tenants to have agreed a repayment plan or dealt with any rental arrears well before this deadline.

The ringfencing scheme will operate alongside a system of binding arbitration. The Government’s proposals for the system of arbitration are that either the landlord or tenant can unilaterally refer a dispute to the arbitration scheme within 6 months of the Bill being enacted. The Department for Business, Energy and Industrial Strategy will publish a list of approved arbitrating bodies that must be used by the parties. The Bill also contains more detail on the process the arbitration must follow.

The Bill outlines two key principles in relation to the arbitration process, stating that the arbitrator must take the following principles into account:

Any award should aim to preserve the viability of the tenant's business so long as this does not prejudice the landlord's solvency.

A tenant that can pay the ringfenced rent debt in full should do so without delay - any relief should be no greater than necessary for the tenant business to afford the payment.

Whilst the Bill is therefore focussed on preserving the viability of tenants’ businesses, it requires arbitrators to balance this with the consideration of the landlords’ solvency. A tenant’s businesses should not be saved at the landlord’s expense. This is a clear message that the Government expects tenants who are no longer in financial difficulties to meet their contractual liabilities under their lease. Similarly, if a tenant business is not viable, and rent concessions would not make the business viable, an arbitration referral must be dismissed.

Arbitrators have been given powers by the Bill to grant relief in relation to a ringfenced debt in the form of the following:

writing off the whole or part of the debt;
giving additional time to pay the debt or allowing the debt to be paid in instalments – payment must be within 24 months; and/ or
reducing or cancelling the interest owed in relation to the debt.

Once the arbitrator has made a decision, they must publish the award made under the Bill and set out their reasons for doing so. Their decision will be legally binding on both parties and the potential to appeal the decision is very limited.

Code of Practice

In June 2020 the Government published a voluntary Code of Practice to support commercial landlords and tenants who wanted to negotiate affordable rental agreements. The rationale behind the Code was to protect viable businesses during the pandemic by enabling these negotiations to follow a fair and principled process.

The Code is intended to be used by landlords and tenants as a guide for negotiating unpaid rents. Key to this process were the principles that the Code imposed on landlords and tenants of negotiating in good faith, with transparency and collaboration and an obligation for both parties to act reasonably. The government ideally want landlords and tenants to negotiate using the principles set out in the Code to agree rent disputes before the Bill is introduced. The arbitration process is therefore seen as an instrument to use when negotiations have failed.

The Code also includes a list of the businesses that are affected by the Bill and also the relevant ringfenced periods at Annex A.

Comment

The Bill has had its second read through in the House of Commons and is currently in the Committee stage where Parliament provide oversight. Hopefully this will provide some clarity in certain areas that are currently lacking. If Parliament fail to provide clarity or spot some areas of the legislation that are unclear or that need improvement, it will be up to the courts to interpret the legislation.

Also lacking is clear Government guidance as to the discretion of the arbitrators to make decisions on disputes. For instance, different arbitrators may decide disputes that have similar facts very differently and provide conflicting reasons for reaching those decisions. A decision of one arbitrator will not create a binding precedent that other arbitrators then have to follow. Hopefully further guidance will be provided by the time that the Bill is enacted on 15 March 2022, otherwise landlords and tenants that want to use the arbitration scheme will face uncertainty as to the outcome of any arbitration.

The arbitration process is likely to be an expensive route for landlords and tenants. A fee will be payable and the financial disclosure required to assess whether the tenant’s business is viable is likely to be time consuming and costly. The Government has placed an emphasis on the Code and clearly wants landlord and tenants to negotiate any rental arrears prior to self-referring to the arbitration scheme. It is also useful for tenants whose rental arrears fall outside of the scope of the Bill as it sets out key principles to assist negotiations with landlords. The ambiguous nature of the arbitration scheme in its current form will no doubt mean that many landlord and tenants will want to make sure that rental arrears negotiations start soon to avoid a potentially costly and uncertain arbitration process.

If you are a commercial landlord or tenant and would like to discuss any of the issues raised in this article, please contact either Stephen Dean or Michael Anderson to discuss further.