When the moratorium on commercial rent arrears in England and Wales was lifted on 25 March 2022, there was a risk that, without government intervention, courts would be flooded with cases. Not only would this have further clogged up an already congested system, it would have had a devastating impact on our high streets.
Commercial tenants, unable to pay rental arrears accrued as a result of pandemic-related restrictions, would have had to – quite literally – shut up shop. Initial projections estimated there could be around 7,000 disputes, amounting to around £8bn of arrears awaiting resolution.
The government has taken steps to mitigate the risks of court action and immense damage to the UK's high street by steering landlords and tenants that are in dispute towards mediation and arbitration. By doing so, it is shining a legislative spotlight on alternative dispute resolution (ADR) methods.
Motivated partly by a desire for a way forward from the moratorium but also to avoid harm to high streets and exacerbating the court backlog, the government published its updated Commercial rent code of practice in April 2022. This reiterates its preference for landlords and tenants to work together on resolving issues with unpaid rents. They are encouraged to find their own, innovative solutions to allow business to continue, even where this may fall outside the terms of the lease.
There remains in the updated code a recognition that such negotiations may be challenging for either party. Accordingly, where such negotiations do not result in agreement, the code suggests using a third-party mediator employed by mutual agreement of tenant and landlord.
What benefits does mediation offer?
It is easy to see why the government would favour mediation; for example, proceedings are confidential, which will appeal to landlords dealing with arrears on multiple premises.
Mediation is also quicker and cheaper than court or arbitration, with disputes often being resolved during the course of a one-day hearing. Even more attractive is that the parties remain in control of the outcome, rather than having it imposed on them by a mediator.
However, where mediation comes into its own is its unique ability to preserve business relationships, which is essential for parties such as landlords and tenants that wish to continue working together. Help from a mediator who is an expert in the subject matter under dispute can ensure that parties focus on practical, workable solutions.
Mediators in the RICS Business Rent Mediation Service, for example, draw on their experience and expertise in the sector to analyse and test the proposals made by each party, helping them reach a responsible, commercial agreement.
Government introduces statutory arbitration route
Not all rent arrears cases will be solved through negotiation or mediation, however. For this reason, the government has introduced a legislative backstop: the Commercial Rent (Coronavirus) Act 2022. This introduces a binding arbitration scheme for ringfenced rent debt built up by businesses that were forced to close during the pandemic. This came into force on 24 March.
For the next six months, if matters cannot be resolved by negotiation or mediation the only recourse now available to parties is to use the new statutory scheme. Seven organisations have been selected by government as arbitrator-appointing bodies, of which RICS is one.
Unlike mediation, which requires both parties to agree to participate, this process allows either landlord or tenant to take the other to arbitration without their agreement. The parties must each submit a proposal and evidence about the way the protected rent debt should be dealt with; for instance, whether any of the arrears should be written off, or repaid in instalments. The arbitrator must then implement the proposal that best maintains the viability of the tenant's business without affecting the solvency of the landlord.
Parties receive a final and binding decision on how they are to proceed, with the same limited grounds of appeal as set out in the Arbitration Act 1996. The award will vary the terms of the lease in relation to the payment of the protected rent debt; accordingly, the tenant will not breach the lease by failing to pay a debt written off by the arbitrator.
'The arbitrator must then implement the proposal that best maintains the viability of the tenant’s business without affecting the solvency of the landlord'
Procedure aims to support all scales of business
There is already an abundance of commentary espousing the virtues of arbitration over litigation. To list a few of these advantages, the former is often faster than the latter; it can be cheaper, and the procedure more flexible; it is confidential; and there are limited options for appeal, thus limiting the duration of the dispute.
The arbitration procedure under the 2022 Act maintains these benefits and offers up some more. One of the unique features is the requirement for the applicant party to pay the arbitrator’s fees upfront, before the arbitration commences. Approved arbitration bodies must publish schedules of fees on their websites, so the process is transparent and certain as to costs.
RICS’ Covid Rent Arrears Arbitration service, for example, offers different levels of fees, so it can be used by small- and medium-sized businesses. At the other end of the scale, more comprehensive evidence and argument is accommodated for with higher fees for bigger-value and more complex cases.
Another feature of the process is that appointing bodies are empowered to remove arbitrators in certain circumstances – a power until now exercised only by the courts. These features are intended to simplify the process, to level the playing field for businesses of all sizes, and to ensure there is no recourse to the courts at any stage.
Over the course of the next six months, we will no doubt hear more about how the new process has been received and used by parties. What is clear, however, is that there is some pressure not only that it succeeds, but demonstrates to government that statutory ADR can take centre stage and offer an effective replacement for litigation.