Our previous articles commented on the expectation that the Government would announce the next steps for commercial tenants shortly. They had been clear that the existing moratoriums preventing landlords from taken a number of different routes to enforce rent arrears would be ending after the extended date of 25 March 2022. Input had been sought on the right scheme to deal with any remaining arrears and the decision is that arbitration is the appropriate process.
The Commercial Rent (Coronavirus) Bill (“the Bill”)
- The Bill sets out the mechanism whereby within 6 months of it becoming law either a landlord or tenant can refer the arrears to an arbitrator to determine. This is however only possible if:
- The arrears are of commercial rent and/or service charges (including insurance);
- The business tenancy is protected by the Landlord and Tenant Act 1954 (excluded tenancies will not be included in the regime);
- The tenant was adversely affected by COVID-19, meaning that they were subject to a “closure requirement”. This requires the Coronavirus Regulations to have applied to close their business or premises. Limited opening is specifically excluded such as takeaways only from cafes; and
- The arrears must have accrued during the “protected period”. This is defined as 21 March 2020 – 18 July 2021 (extended to 7 August 2021 in Wales).
The Bill has reached report stage in the House of Commons and interested parties have already commented on likely issues with the drafting and application of the Bill. It is likely that disputes will arise as to the extent of the closure requirements applying to a certain business/premises in particular.
The Bill is intended to have retrospective effect, in that whilst a County Court Judgment for arrears has been one of the few options available to landlords during the moratorium on winding-up, commercial rent arrears recovery (“CRAR”) and forfeiture, these are not binding if they are obtained after 10 November 2021. Any Judgment obtained and not paid can be referred to the arbitration scheme when it is implemented – or the Court can stay a claim before reaching Judgment pending such a referral.
This provides landlords with very little options to enforce payment of arrears before the scheme is implemented. The current drafting does not apply to guarantors albeit that may change. Anecdotally it appears the Court is willing to order a stay of claims against guarantors too in anticipation this loophole may be closed on further review of the Bill. They currently have no power to do this but appeal of such decisions is likely to be futile and disproportionate and so may not be questioned in the short term.
The fear is that any debts during this period which have not yet been resolved are as result of entrenched positions from landlords and/or tenants and that the scheme may resolve matters once and for all, but there is a risk that landlords of inactive tenants will have to wait until the 6 month period expires or refer themselves and run the risk of a determination they do not like before they can finalise the issue.
The Arbitration Scheme
The scheme itself provides for approved providers to be appointed only. Concerns are high that the number of arbitrators will not be sufficient for the work required and that delays will follow.
The intention is that parties put forward proposals, with supporting evidence, and the arbitrator must decide if the tenant’s business is “viable”. If it is not then no award will be made and the referral dismissed i.e. the whole amount remains payable but the chances are the tenant will be insolvent or impecunious.
If the tenant’s business is “viable” then the arbitrator can decide what relief from payment is provided to retain this viability. It appears the discretion is quite wide and so there is a risk to landlord’s only given that tenants have been held by the Court to have to pay in full contractually it is only they that will benefit from this process.
The costs of the scheme are paid for by the referring party – but the arbitrator can alter that presumption. All other costs of the parties, including any legal assistance, are paid by them alone and the arbitrator cannot order another party to reimburse those costs.
It remains to be seen exactly what form the Bill will take when passed and how it will be implemented. We will provide further updates as the matter progresses but in the meantime landlords need to carefully consider their options before embarking on any action and may be minded to enter agreements to avoid a referral to arbitration.
If you have any questions or concerns on how the Commercial Rent (Coronavirus) Bill might impact your matter, please contact our expert property litigation lawyers by emailing firstname.lastname@example.org
Drafted by Rachel Gimson, Partner, with input from Charlotte Jasicki, Trainee Solicitor.