The moratorium on commercial tenant evictions due to non-payment of rent during Covid-19 lockdowns expired last month (25 March), opening up a two-year backlog of unresolved rental debt disputes between landlords and tenants.
Covid-19 lockdowns forced businesses across the UK to close their premises and suspend trading while they were still liable for rental and service charges. The government’s temporary eviction moratorium eased the burden by tilting the financial burden onto landlords, which strained commercial relationships between tenants and their landlords whose balance sheets were also frayed.
It created an unresolved stockpile of unpaid rental arrears, which must now be settled. The expiry of the eviction moratorium was timed with the Royal Assent of the Commercial Rent (Coronavirus) Act, which aims to resolve outstanding commercial rent disputes through an efficient, affordable and legally binding arbitration procedure. The government has appointed, amongst others, the Chartered Institute of Arbitrators (CIArb) and the Royal Institution of Chartered Surveyors (RICS) as the approved bodies to appoint arbitrators under this statutory arbitration legislation.
However, all parties must show evidence of attempted settlement dialogue, negotiation and mediation before arbitration, as detailed in the draft Statutory Guidance. BTG Advisory is well placed to represent tenants and landlords as an adviser in negotiations right through to mediated settlement or to provide suitably skilled and experienced arbitrator services as required. All parties must act under the government’s Code of Practice for commercial property relationships affected by the pandemic.
For many reasons landlords and tenants will not want pandemic-era rental arrears to end in arbitration, positioning both sides in favour of a settlement. Typically, neither party will want to interrupt an otherwise mutually beneficial commercial relationship and will consider failure to reach an amicable comprise as a communication and commercial relationship failure. It would also open the door to a legally binding determination by a third party as arbitrator which may be worse – for one or even both sides – relative to a mutually negotiated settlement where both parties retain influence over the outcome. In a sense, the arbitration procedure should be considered as a last resort, where mediation fails (although the Act has provisions for arbitration failure). As such, we expect the backlog of cases will likely lead to a flood of settlements and a trickle of arbitration determinations. Ultimately, the system is designed to encourage settlement and to keep the disputes out of the courts. However, in those cases where settlement is not reached, with the experience, skills and knowledge embedded in BTG Advisory, we are perfectly positioned to represent landlords or tenants in rental debt disputes
Under this new legislation, arbitrators are responsible for making legally binding awards on rent debt relief for businesses negatively affected by pandemic-related business disruption. In adjudicating these cases, arbitrators aim to resolve disputes in a cost-controlled and equitable way for both sides. Landlords need protection from unscrupulous ‘zombie’ companies seeking rent debt relief that were demonstrably struggling financially prior to the onset of the pandemic. At the same time, viable businesses whose cash flows were disrupted beyond reasonable control by the pandemic may have a legitimate case for some rent debt relief.
Arbitrators must evaluate the viability and profitability of tenant businesses to determine an affordable rental arrears repayment to their landlord, which may range from 100% of the owed amount to zero. An arbitrator must weigh up the evidence and make a determination. The complexity of disputes can vary widely. For example, an arbitrator must consider to what extent the rent debt is affordable for a business to repay in the context of the company cash flows and pre-existing liabilities. At the same time, the impact of any debt relief to a tenant of the landlord must also be taken into account, particularly landlords with their own solvency concerns and those with a heavy concentration of tenant rental debt relief claims.
BTG Advisory can offer advisory services in settlement of cases or provide arbitrator services, where required. We have decades of experience in advisory services, corporate dispute resolution – including M&A, shareholder, partnership disputes and fraud, as well as providing forensic accounting expert witness services. If you would like to discuss your case, please get in touch with us today.