PROPERTY JOURNAL

How will COVID-19 rent arbitration work?

As the Commercial Rent (Coronavirus) Bill proceeds through Parliament, details are emerging of what the rent arbitration process might look like – but questions remain on a number of details

Author:

  • Rachel Lindberg
  • Amy Dunn

04 February 2022

Empty multi-level Liverpool shopping mall in March 2020 with single person in shot

The COVID-19 pandemic resulted in many commercial businesses being forced to close for significant periods. During this time a large number of tenants were unable to generate income and there was increasing concern that many shops, cafes, clubs and other businesses would fail if landlords evicted tenants for not paying rent. At the same time, commercial landlords such as pension funds and investment funds, that relied upon receiving rental income from its tenants, struggled to grapple with non-paying tenants right across their portfolios.

The government introduced a raft of temporary measures to try and strike a balance between the two competing interests. Such measures included a moratorium on the ability for landlords to evict commercial tenants for their failure to pay rent as well as restrictions on the use of CRAR (commercial rent arrears recovery) and winding up petitions.

The moratorium on commercial evictions ends on 25 March 2022 and the government is concerned that this will lead to a plethora of court actions taken by landlords seeking to recover unpaid rent which is likely to overburden the courts and could ultimately lead to the closure of many businesses. 

In response to these concerns and to avoid recourse to the courts, at the end of last year the government introduced the draft Commercial Rent (Coronavirus) Bill, expected to come into force in March. If enacted, this will enable commercial landlords and tenants to enter into a binding arbitration process for settling disputes over the payment of arrears built up during the pandemic.

Who does it apply to?

Most of the legislation applies only to England and Wales, though there are some provisions that extend to Scotland. Northern Ireland is likely to adopt a similar scheme, albeit under separate regulations.

The scheme will apply to businesses that were mandated to close in full or in part due to coronavirus regulations. Only tenants that are otherwise viable businesses can benefit from the scheme – a test that appears to be wider than simply a question of the tenant's solvency. 

Tenants that have already paid, agreed a concessionary deal or that have compromised the arrears by writing them off under a company voluntary arrangement (CVA) cannot apply for arbitration of those arrears.

What arrears does it apply to?

The scheme applies to arrears that built up between 21 March 2020 to the earlier of 18 July 2021 or the last date on which the tenant's business or premises, or part of them, were subject to a closure requirement or a specific coronavirus restriction. This is called the ringfenced period.

Arrears will comprise more than just principal rent. Rent is defined as any amount payable by the tenant for the possession and use of its premises, so this will include service charges, insurance, VAT and interest for late payments. The scheme also covers amounts drawn down on rent deposits where tenants have failed to top up.

The scheme would not cover arrears from outside the ringfenced period, which can still be pursued separately through the courts. The current restriction on forfeiture, on the commercial rent arrears recovery process (CRAR) and on winding-up petitions will no longer apply to arrears outside this period either.

'Arrears will comprise more than just principal rent'

What form will arbitration take?

The parties have six months from the date the legislation comes into force to refer the matter to arbitration. Assuming the legislation passes in March as expected, this means they must do so before the end of September.

The arbitrator will have to apply certain principles – such as preserving or restoring the tenant's viability, where it is consistent with preserving the landlord's solvency – when making their award. However, they are also given a wide power to award relief for tenants. This includes the ability to impose rent deferrals and repayment plans, up to a maximum of 24 months, reducing the amount of arrears, or writing off the debt altogether. 

The scheme seeks to discourage the parties from taking extreme positions by providing that if one party puts forward a proposal consistent with the applicable principles and the other does not, the arbitrator is bound to adopt the former.

Provisions remain to be clarified

As the bill is still in draft form and proceeding through Parliament, there may be amendments to the text before it is enacted. These may include the following. 

  • The bill currently says nothing about the arbitrator's power to determine whether the rent claimed by the landlord is actually due, in cases where the tenant alleges that it is not.

  • Tenants might be nervous about disclosing commercially sensitive or confidential financial information during the process, and are calling for arbitrators to have the power to hold the whole hearing or any part of it in private. Bodies representing commercial tenants have been vocal on this e.g. the Commercial Tenants Association (CTA). On the other hand, landlord organisations such as the British Property Federation (BPF) are concerned that tenants who are well-funded have been using the moratorium to avoid paying rents. They are asking for greater disclosure of financial information.

  • The bill assumes that the parties will bear their own costs for the arbitration, although the arbitrator may instruct a party to pay a greater contribution of the fees for the process. There have been calls for the arbitrator to have more discretion over the question of costs, to encourage parties to act reasonably.

  • The bill imposes a moratorium on court proceedings for arrears issued on or after 10 November 2021. Tenants are therefore pushing for the scheme to also include arrears proceedings that were issued prior to 10 November 2021, in order to avoid a perceived loophole for landlords that already have proceedings in progress.

  • The parties have six months from the date the legislation is passed to refer the matter to arbitration. Tenants are concerned that landlords might seek to exploit the deadline; for example, landlords might suggest that a favourable deal could be on the table to dissuade the tenant from making a referral to arbitration. Once the deadline has passed, the landlord could withdraw from negotiations and seek to recover the full amount of arrears. The government might, therefore, need to consider extending the six-month period or give the imposition of a hard stop deadline for referrals a rethink altogether.

  • Greater clarity is needed about how the arbitrator should tackle the assessment of a tenant's viability. Is the test forward-looking; that is, does it consider whether the tenant will remain a viable business, and if so for how long? Or will it be backward-looking, considering whether the tenant would have been viable were it not for the pandemic? Will the financial position or viability of a guarantor or the tenant group as a whole be taken into account?

  • The government anticipates that arbitrators will be accountants or surveyors, but further queries have been raised about the qualifications they will require.

Guarantors cannot currently benefit from the scheme, arguably resulting in the debt being pushed from one party to another. If landlords can enforce against guarantors, then a guarantor will most likely seek recovery from the tenant, undermining the purpose of the bill.

Rachel Lindberg is an associate and Amy Dunn is a legal adviser at Hogan Lovells

Contact Rachel: Email

Contact Amy: Email

Related competencies include: Communication and negotiation, Landlord and tenant

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