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New arbitration process for resolving COVID-19 commercial rent debts

Posted on 9 November 2021

The Government announced today (9 November) that it is introducing new laws and a revised Code of Practice to deal with the remaining commercial rent debts accrued because of the pandemic.

Key Points

  • New legislation introduces a legally binding arbitration process from March 2022
  • Will cover rents that accrued while businesses were legally forced to close during the pandemic
  • Revised Code of Practice:
    • where affordable, tenants should pay rent in full;
    • landlords should make appropriate concessions to preserve viability of tenant's business, but not at the cost of landlord's solvency
  • Effective ban on court proceedings for rent arrears from 10 November 2021
  • Ban on forfeiture based on rent arrears continues until March 2022

Revised Code of Practice

The Government published a revised Code of Practice today. As before, this encourages tenants who can pay their rent to pay their rent in full. However, tenants who cannot afford to pay their rents in full to negotiate with their landlord for arrears to be waived or postponed, where the landlord is able to do so. The revised Code also explains how the new arbitration system will work and the principles to be applied.

The Code applies to all rent arrears that have built up as a result of the impact of the pandemic, even for businesses that were not legally ordered to shut their premises. It is therefore wider than the new legislation published today, which we summarise below.

Principles to be applied when balancing landlords' and tenants' interests

Underpinning the scheme are two key principles. Firstly, that an arbitration award should be aimed at preserving the viability of a tenant's business so far as that is consistent with preserving the landlord's solvency. The second principle is that a tenant should meet its obligations regarding payment in full and without delay, provided that its viability is protected.

The Government has made it clear that the new arbitration scheme is intended to be used only as a last resort where landlords and tenants have been unable to resolve unpaid rent disputes between them. The scheme seems to strike a reasonable balance between the interests of landlords and tenants with the intention of providing a relatively quick and cost-effective means of resolving disputes.

New legislation – the Commercial Rent (Coronavirus) Bill

The Bill establishes a legally binding arbitration process for commercial landlords and tenants who have not already reached agreement. The parties and the arbitrator will be expected to follow the principles in the Bill and the Code of Practice. The Government hopes the Bill will become law in 2022.

The Bill applies only to commercial rent debts (including service charges and insurance payments) which accrued during periods when businesses were forced by law to close during the pandemic.

This means businesses forced to shut during the pandemic, such as restaurants, pubs, gyms and non-essential retail, will be able to rely on the new process for arrears that built up during the specific periods of forced closure only. This will also include businesses forced to shut in part, such as restaurants that were able to maintain a takeaway service with reduced turnover.

Businesses permitted to stay open throughout the pandemic will not be covered by the arbitration process, even if they chose to close for several months as turnover plummeted. For example, a sandwich shop in a city centre with no seating area.

The new legislation will apply to England and Wales, with power for Northern Ireland to introduce similar laws. Scotland has adopted an alternative approach to legislation in this area. The Code of Practice, however, will apply across the UK.

The new arbitration process

Where the landlord and tenant have been unable to reach agreement, either can apply for arbitration. The arbitrator will impose a legally binding agreement. Details of the arbitrator's award will be published, except for confidential commercial or personal information.

The parties will be free to continue negotiating after the arbitration process has commenced and will be encouraged to pursue alternative options such as mediation.

The window to apply for arbitration will be six months starting on the date the new legislation comes into force, probably March 2022, with a maximum timeframe to repay of 24 months from the date of the award.

The arbitration process will be delivered by private arbitrators who will have to go through an approval process. The Government will publish a list of approved appointing bodies. Landlords and tenants will be able to apply directly to any approved arbitration body for their dispute resolution if negotiations have failed.

Forfeiture ban continues until March next year

Forfeiture of any commercial lease based on rent arrears will continue to be banned until 25 March 2022, as announced in summer 2021. This is not limited to premises that were legally forced to close.

Other restrictions on enforcement against tenants

Once the Bill receives Royal Assent in spring 2022, landlords will be prevented from bringing court claims against tenants for commercial rent debts where premises were legally forced to close. For proceedings issued between 10 November 2021 and Royal Assent, either party may apply for a stay to enable the dispute to be referred to arbitration. Where no stay is sought and judgment is given in favour of the landlord, the tenant can refer the judgment debt to be dealt with by arbitration and the judgment will be taken to be varied in accordance with the arbitrator's award.

From Royal Assent, landlords will also be prevented from exercising commercial rent arrears recovery rights (CRAR), commencing insolvency proceedings, forfeiting leases or taking money out of a rent deposit account, in each case where the arrears accrued during periods when premises were legally forced to close.

Comment

As many have observed, it is in parties' long term interests to work together where possible so that businesses can trade out of the pandemic.  The British Property Federation reports that agreement has been reached on rent arrears in more than 80% of cases so far.

It is to be hoped that those landlords and tenants who have yet to resolve their disputes will, in the majority of cases, be able to reach agreement without recourse to arbitration.

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