The government announced the highly-anticipated draft Commercial Rent (Coronavirus) Bill (the Bill) and revised Code of Practice on 9 November 2021. The government’s intention is that, where possible, rent debt accrued as a result of forced closures during the pandemic should not force an otherwise viable business to cease operating. The Bill therefore seeks to introduce binding arbitration procedures where agreement on the payment of such rent arrears has not already been reached.
The government’s hope is that the Bill will come into force from 25 March 2022. To provide the time to introduce and pass legislation, certain temporary restrictions (e.g. the moratorium on forfeiture and restrictions on the use of the Commercial Rent Arrears Recovery regime) remain in place until March 2022 and new measures preventing a circumvention of the new regime are introduced (see our earlier related blog post here).
What type of rent arrears does the regime apply to?
The new regime applies only to rental arrears on business tenancies relating to any period between 21 March 2020 and 18 July 2021 (in England), during which a tenant was obliged under Covid regulations to close the whole or part of its business (such arrears referred to as protected rent debt). Rent debts attributable to other periods will fall outside of this regime.
What does the arbitration do?
If passed, the Bill will introduce a binding arbitration process for businesses in scope who have not been able to reach agreement with their landlords. For a period of six months after the Bill is passed, a tenant or landlord can make reference to arbitration and must submit a proposal for resolving payment of the arrears. The counterparty will have 14 days to submit its own proposal. The arbitrator must then assess the viability of the tenant’s business. If the arbitrator determines that the business (a) is not viable, and (b) would not be viable even if the tenant were to be given relief from payment of any kind, they must dismiss the reference. In making its decision, the arbitrator must have regard to certain factors set out in s.16 of the Bill. These include the tenant’s assets and liabilities, any other tenancies the tenant may have, and any financial information the arbitrator considers appropriate. No regard may be had to the possibility of the tenant (or the landlord) borrowing money or restructuring its business.
If the arbitrator concludes that the tenant’s business is viable, they must make an award which accords with certain principles set out in s.15 of the Bill. These principles are that:
- an award should be aimed at preserving or restoring the business of a tenant, while preserving the solvency of the landlord; and
- so far as is consistent with that, the tenant should be required to meet its obligations without delay.
An award may reduce the rent debt or to give the tenant extra time to pay (of a maximum of 24 months).
Temporary restrictions on landlords
The Bill introduces, in addition to the existing restrictions on forfeiture, Commercial Rent Arrears Recovery and winding-up petitions for commercial rent, a “moratorium period” for six months after the Bill comes into force or, in relation to specific parties, until an arbitration concludes. During the moratorium period, a landlord may not bring a debt claim (i.e. civil proceedings claim) to enforce protected rent debt. To prevent landlords from rushing to make their claims in the interim period and thereby undermine the new regime, either party can apply to court to stay debt proceedings commenced after 10 November 2021 but before the Bill is passed into law. In those circumstances, the Court would be obliged to do so.
Comment and points of interest
This is a very interesting and novel approach to a unique situation. On its face, it looks like a good way to resolve the problem of the pandemic rent arrears overhang.
While the draft legislation will have to go through the parliamentary process and may not emerge in this form, it clearly provides an incentive for landlords and tenants to reach an agreement on unpaid rent, at least for the period to which the Bill relates. Many landlords and tenants have already engaged in constructive discussions, but the prospect of binding public arbitration will add a further dimension.
While the draft legislation is in theory all about “arbitration”, it doesn’t relate to the legal rights of the parties. The process revolves around the arbitrator’s commercial assessment as to how much a tenant can afford to pay and how much a landlord can afford to write off, with both parties surviving. A tenant will need to strike a careful balance between showing that it needs relief (and should therefore receive an award in its favour) and maintaining that it has a viable business.
Much will rely on the arbitrator’s view of the different positions put forward by landlords and tenants and the assessment he or she has to make will be reasonably subjective – it is clear that the arbitrator’s role is to come to a position that is “just”. In practice, such assessments can be expected to be quite involved and the Bill seems to envisage a fairly summary process. Additionally, it is uncertain where a tenant will be left if the arbitrator determines its business is not viable and the arbitration process is therefore not even available. This may, for example, have directors’ duties implications – a potentially high-risk strategy where a tenant’s business viability is borderline.
Another interesting point to note is that tenants who have successfully sought relief through arbitration may not include the protected rent debt in any CVA, restructuring plan or scheme of arrangement for a period of 12 months after the award is made by the arbitrator. However, an arbitrator can award the tenant up to 24 months to pay the debt. It is uncertain how this will work in practice, i.e. whether the tenant will be able to restructure the outstanding protected rent debt after the 12 month period, but before it is fully paid off – we assume that this is just one of the drafting points that will be fixed before the Bill becomes law.
The Bill seems to contemplate arbitration between a single landlord and tenant. In practice, this would mean that institutional landlords or tenants with multiple tenancies may be faced with piecemeal proceedings rather than a consolidated process. If that is the case, tenants with multiple tenancies may prefer to utilise the traditional restructuring tools for dealing with rent arrears (e.g. CVAs). This could lead to such a tenant seeking to initiate a restructuring process before being barred from doing so by a landlord referring the dispute to arbitration and an arbitrator being appointed.
With estimates on the shortfall of rent paid by commercial tenants during the pandemic set to exceed £7 billion (see Remit Consulting’s blog), there is clearly a long way to go to resolve this issue. Given the uncertainty, distraction and cost both parties to an arbitration are likely to face, the very prospect of an arbitration of this nature may be enough to incentivise the parties to negotiate a consensual outcome.
Much will rely on the arbitrator’s view of the different positions put forward by landlords and tenants and the assessment he or she has to make will be reasonably subjective – it is clear that the arbitrator’s role is to come to a position that is “just”