The Government has now formulated its plan for dealing with commercial rent arrears which have accrued as a result of the Covid-19 pandemic.
Binding arbitration to deal with arrears claims
The Commercial Rent (Coronavirus) Bill 2021 – 2022 ("the Bill") was introduced into Parliament on 9 November 2021 and is currently being considered by the House of Lords before its planned enactment from 25 March 2022. The Bill will introduce a binding arbitration process for resolving the outstanding commercial rent arrears disputes. However, if passed, the Bill will only protect those businesses which have been affected by periods of enforced closure, due to the lockdowns.
A New Code of Practice
The Government has also published a new Code of practice for commercial property relationships following the COVID-19 pandemic (“New Code”). Unlike the Bill, the New Code is only advisory and not binding law, but it will apply to all commercial rent arrears, whether or not a business has been subject to Government restrictions.
The main objective of the Bill and the New Code is to protect viable businesses and the jobs that they offer and to share the financial burden of the pandemic between the tenants and landlords. This will be achieved by the arbitrator balancing the needs of the tenant’s business, which is otherwise viable, against the needs of the landlord to ensure its solvency. As such, the arbitrator will have the power to:
- write off the whole or any part of the debt,
- allow the tenants time to pay off the debt and to pay by instalments, and
- reduce or write off any interest payable by the tenants in respect of the debt.
It is important to distinguish between protected and unprotected rent arrears, as the Bill will only affect landlords’ remedies in respect of the protected rent. Rather surprisingly, “protected rent” will include service charge arrears in addition to rent arrears, as well as insurance rent arrears, interest on any such sums and VAT.
When will it apply?
In order to be protected by the Bill, the arrears must have accrued during a period starting on 21 March 2020 (being the date of the first Government restrictions) until the date when specific restrictions were lifted for the relevant sector.
The Bill is intended to be time limited and will apply for a period of six months from the date the Bill comes into force. Under the proposed wording of the Bill, any outstanding commercial rent disputes will need to be referred to the arbitrator, which will prevent landlords relying on the usual remedies of issuing debt proceedings, forfeiture, Commercial Rent Arrears Recovery (CRAR), opposing a lease renewal under the Landlord and Tenant Act 1954 for non-payment of rent, making a withdrawal from the rent deposit and issuing bankruptcy or winding up petitions during the period when the Bill is in force.
In addition, the Bill is proposed to have effect retrospectively. As such, any claims issued by landlords in respect of the protected rent arrears on or after 10 November 2021 and before the Bill is enacted will be stayed on an application by either party and the claim will be referred to arbitration instead.
The Bill imposes a detailed framework and strict timetable for making referrals to arbitration and, thereafter, complying with the scheme. It is important to obtain expert legal advice to ensure that correct procedure is followed in preparation for and during arbitration.
The Bill contains provisions requiring parties to share the costs of arbitration and hearing (if one takes place). However, each party will be expected to bear its own legal costs. Although the Government intends to monitor the arbitration process and the fees charged by arbitrators, going through arbitration will no doubt increase the financial burden on landlords and tenants.
What can be done in the meantime?
Now that we have details of the framework for settling commercial rent disputes, landlords and tenants may wish to hold discussions with a view to settling their disputes without arbitration. This would enable landlords and tenants to achieve an early resolution, save costs and agree on remedies which are not within the arbitrator’s powers to order. Any such agreements should be properly recorded in a settlement agreement.
Finally, landlords may continue to use CRAR to recover commercial rent arrears as long as the net sum of rent arrears is equal to at least 554 days’ rent.
If you have any queries on the new proposed changes or require advice on specific cases, please do not hesitate to contact one of the expert solicitors in our Property Litigation department:
Alan Dixon – Partner - 0207 549 7895 - A.Dixon@dklm.co.uk
Michael Adamson – Partner - 0207 549 7872 - M.Adamson@dklm.co.uk
Agnieszka Nowak – Solicitor – 0207 549 7450 – A.Nowak@dklm.co.uk