The commercial letting industry bore many scars following the COVID-19 pandemic. The mandated closures enforced across the retail and hospitality sectors had a widely negative impact on most tenanted businesses, with the government itself estimating that was in excess of £9 billion still owing in rental arrears at the end of March 2022.
Throughout the crisis, the Government utilised a range of legislation in an attempt to find a fair balance between protecting tenants from the risk of total collapse whilst also ensuring the long-term viability of commercial landlords.
But then on 24 March 2022 the Commercial Rent (Coronavirus) Act 2022 came into force, ending many of the restrictions currently placed on landlords dealing with rent arrears. A Code of Practice designed to provide a practical framework for rent (and service charge) arrears negotiations between landlords and tenants was also issued, marking positive progression for a challenging issue.
In this article, we’ll look at exactly how that arbitration scheme will operate, and what all of these changes will mean for the tenants struggling to deal with the looming danger of Covid-19 related arrears.
What were the restrictions placed on commercial landlords?
Under the terms of the original Coronavirus Act 2020, many of the courses of action open to commercial landlords dealing with rental arrears were restricted temporarily.
For example, during the period that restrictions were in place, the right to forfeit a commercial lease on the grounds of non-payment of rent was placed under a moratorium, as was the use of Commercial Rent Arrears Recovery (CRAR).
Normally, using CRAR, a commercial landlord would be able to serve notice on a tenant once rental arrears have reached a specified level but under the restrictions, this was extended to a period of 554 days.
At the same time, the use of statutory demands in pursuit of unpaid debt caused by COVID-19 was suspended, removing the landlord’s ability to pursue tenants failing to pay within a 21-day deadline with a petition to have the tenant wound-up.
During the pandemic, landlords were urged to make concessions based on the long-term track record of the tenant and the impact an enforced closure would have. Other more practical measures were encouraged, such as:
• A full or partial rent-free period for a set number of payment periods;
• A deferral of the whole or part of the rent for one or more payment periods;
• The payment of the rents over shorter payment periods for a set time (e.g. monthly rather than quarterly) including provision for their payment in arrears;
• Rental variations to reduce ongoing payments to a current market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site, incorporating any period during which the site was closed; and
• Landlords drawing from rent deposits on the understanding that they won’t then demand that the deposits be “topped up” by the tenant before realistic or reasonable.
Although the idea of reaching a compromise might have initially seemed appealing to both parties, many landlords will have opted to sit-tight through the period covered by the original Coronavirus Act so as to take ‘commercially imperative’ recovery action.
However, under the new legislation, landlords hoping to recoup arrears built during the ‘protected period’ running from 21 March 2020 to 18 July 2021 may simply have to accept that arbitration is inevitable if a compromise is not forthcoming and that the results will be binding.
In what circumstances does the Commercial Rental (Coronavirus) Act 2022 come into play?
The Act applies to tenants under a business tenancy who were instructed to close their premises or businesses during the pandemic. The focus of the Act is therefore on businesses operating in the retail, leisure, and hospitality sectors.
Parties on either side, if unable to reach an amicable agreement about pandemic arrears, will have the right to unilaterally apply for arbitration during the six months following the date on which the Act was passed.
This may seem like a tight timeline but this is alleviated by the fact that the Government has the power to make regulations extending this six-month period.
Significantly for tenants, the debts covered by the Act include not only rent but also service charges, insurance rent, interest due and any VAT charged.
Both parties will be expected to contribute towards the costs of arbitration provided they have negotiated in good faith. However, if one side is felt to have negotiated unfairly or with prejudice, then the arbitrators will have the power to award costs to the opposing party.
What process will arbitration follow?
The statutory dispute resolution process will be administered by private arbitrators who will have undertaken a pre-approval process confirming their competency. The Government will publish a list of these approved bodies.
The party making the application will have to notify the other party of their intention to pursue binding arbitration in writing. This notification must include a proposed settlement, and within 14 days the recipient must either accept the proposal or submit a counterproposal.
All proposals should be supported with financial evidence demonstrating that they are viable and affordable. Following this, either party can make an application for arbitration, utilising the evidence gathered. A fee will be payable that is likely to be proportionate to the size of the debt in question.
The arbitrator will have the power to defer or write off arrears or impose a repayment plan, working on the principle that the debts stem from the pandemic, and the business would otherwise be financially viable.
Factors taken into account when reaching a decision will include the total assets and liabilities of the tenant, including any other tenancies, as well as the tenant’s payment record. This information will be considered against the solvency of the landlord.
How will the arbitration scheme help to resolve disputes over rental arrears?
The message from Government is clear – the arbitration process is to be used as a backstop, with the priority being negotiation between tenants and landlords. In fact, the Act states that it is possible for parties to continue to negotiate outside of the arbitration process and that any agreements reached in this manner will be enforceable regardless of the arbitration process.
As such, there isn’t an anticipated rush at this stage for use of the scheme. This is reflected in the Government’s own recent (March 2022) estimates, with the number of arbitration cases adjusted from 7,500 cases to 2,500 cases in England and Wales.
If carried out properly, the arbitration scheme should hand down rulings that are fair across the board and it should accelerate the process of returning the commercial rental sector to something approaching normal.
The alternatives would have been to either wipe out the COVID-19 connected arrears as a whole, harming landlords, or to include the now ring-fenced arrears in the overall lifting of the moratorium on recovery, which would have forced many viable businesses into permanent closure.
Regardless, protective legislation has now ended, and landlords are free to pursue unpaid rent using any reasonable remedy. However, they should be mindful that arbitration is only relevant for rent arrears from a ‘protected period’.
If a proportion of arrears does date from a protected period it could result in a range of complications, primarily for the landlord. The tenant may be able to stay the action and the court could order the landlord to pay any costs to date (in the case of debt proceedings), or the landlord might be held liable for the costs of pursuing an unlawful claim (in the case of forfeiture).
The main expectation here is that both parties will continue to act ‘reasonably’. If the arbitrator feels that a tenant is being excessive with their claims, such as asking for an unjustifiable reduction or write-off, then the arbitrator will probably question the long-term viability of the business. And because this is the whole reason as to why arbitration has been introduced, that could be disastrous for all concerned.