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Covid-19 commercial rent arrears and new arbitration scheme

Important information for landlords and tenants

Earlier this month, the UK government published a revised Code of Practice for commercial property relationships alongside a draft Commercial Rent (Coronavirus) Bill which will create a legal arbitration regime in respect of Covid-related rent arrears.

The Bill and Code were announced on 9 November 2021. The Code builds on the voluntary code already in existence from June 2020, generally encouraging landlords and tenants to find common ground and act reasonably during times of commercial rent arrears – in light of the Covid-19 pandemic and subsequent challenges.

For those landlords and tenants who cannot reach an agreement (using the guidance in the Code or otherwise), the new arbitration regime will offer a framework within which to bring an end to an ongoing stalemate and phase back in the usual suite of landlord rights used to ensure timely rental payments under leases. This is much needed given the significant uncertainty caused by the blanket restrictions placed on landlords since the start of the pandemic.

So, what exactly is the new arbitration regime?

The regime’s aim is to preserve – in so far as possible – the tenant business and the jobs that it supports, without undermining the solvency of the landlord. An arbitrator will be appointed at the cost of both parties to assess the position and determine an appropriate remedy. The remedy will be binding on both parties and the right of appeal will be restricted to narrow points of fact.

The arbitration process is not yet law, but is expected to pass through Parliament during Q1 2022 and become binding with effect from March 2022.

The tenant will need to prove it is otherwise viable but cannot afford to pay ”in scope” rent arrears, and the landlord will be able to submit their own evidence to demonstrate the impact of any forgiveness on its own solvency. The arbitrator will then consider these submissions before making a determination.

The regime will only apply to rent arrears under business tenancies in respect of periods where the business or premises were required to cease or restrict trading (NB this time period will differ from sector to sector). This is a significant point as it means that those arrears relating to periods where trading levels were low, but no formal restrictions were in place will NOT fall in the scope of the arbitration process. The Code states that landlords and tenants should seek to follow the same principles for those arrears not in scope, but ultimately the landlord will (eventually) retain the right to pursue this portion of the arrears (if any) in the normal pre-pandemic way.

Restrictions on debt recovery

Tenant protections will remain enhanced whilst arbitration process outcomes are awaited, with the suspension of a landlord’s ability to take legal action, including:

  • issuing debt proceedings such as a CCJ (an additional restriction vs current position);
  • exercising commercial rent arrears recovery (CRAR);
  • exercising the right forfeiture; and
  • draw-down of the tenant’s rent deposit.

Landlords will also continue to be restricted from issuing winding up petitions until arbitration is concluded.

The arbitration process will likely take two to three months and can be applied for within six months of the commencement of the regime (provisionally 25 March 2022). It is, therefore, likely that some tenants and landlords will be in arbitration until the end of 2022, which will create ongoing uncertainty for all parties concerned.

Our initial thoughts

The arbitrators are required to take into account business viability and affordability when assessing their determination. There is significant latitude afforded to the arbitrator in determining what both of the terms “viability” and “affordability” actually mean in practice.

As is the case with any formal dispute resolution procedure, much of the outcome will be based on the subjective view of the determining party. It may be that this risk of an adverse arbitration brings more parties to the table before the process commences, and may encourage tenant co-operation.

All parties are well advised to follow the principles of the Code in their ongoing negotiations as no doubt this will colour an arbitrator’s view.

It should also be noted that once the arbitrator has come to a conclusion, this cannot be compromised by a CVA or Restructuring Plan for a period of 12 months from the date of the arbitration settlement award.

Although agreement has been reached on Covid-19-related UK rent arrears in more than 80% of cases since the start of the pandemic, certain sectors remain heavily indebted to the landlord community. It is hoped that the emerging clarity on the arbitration process encourages those parties that have yet to resolve their differences to face the issue head-on.

Further information

As the Bill is only at the second reading in Parliament, it may be subject to change. We will continue to provide updates as and when they occur. If you need further advice or guidance on your position as either a landlord or tenant, we provide free confidential initial consultations for all.

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