The Coronavirus Act 2020, which was first introduced in March 2020, imposed a moratorium on most enforcement measures available to commercial landlords for recovering commercial rent arrears. This moratorium is due to be lifted on 25 March 2022. In addition, restrictions which were imposed by the Corporate Insolvency and Governance Act 2020 on winding up petitions are also due to end on 31 March 2022.
As a result, commercial landlords will soon have the same enforcement options available to them prior to the pandemic. Here are some helpful FAQs on these changes.
1. My landlord issued proceedings and already has a judgment for unpaid rent, will the Bill apply to that scenario?
The provisions of the Bill do not apply to claims issued before 10 November 2021 and the landlord will therefore have the usual remedies available to it for debt claims issued before that date (regardless of when that debt arose). However, the restrictions on forfeiture and Commercial Rent Arrears Recovery still remain in place until 25 March 2022 and the restrictions on winding up petitions in relation to rent arrears remain in place until 31 March 2022. Nevertheless, it is expected that these current restrictions will be lifted on the dates above (provided that the Bill comes into force before then) and landlords will once again be able to exercise these rights, except to the extent that the debt falls within the scope of the new provisions of the Bill. Therefore, a landlord will once again be able to, for instance, forfeit a lease in relation to rent arrears that do not fall into the definition of ‘protected rent debt’ (see 5 below).
2. My landlord has just issued proceedings for unpaid rent, does that mean that the Bill will not apply?
If the arrears accrued in the protected period and the landlord issued a claim after 10 November 2021, then these proceedings will be stayed. If a judgment is made on such claims before the Bill comes into force, the debt can be referred to arbitration and the landlord will not be able to enforce the judgment.
However, the current draft of the Bill proposes that the arbitration process must commence within 6 months of the date that the Bill comes into force (currently, this is intended to be 25 March 2022 although this may change and there is scope for the government to extend this deadline). It is expected that landlords’ rights will revert to normal at the end of this period and they will be free to commence proceedings and enforce judgments as normal.
3. Will the arbitration process have any bearing on situations where a landlord has taken full rent for the entirety of the enforced closure period by drawing down from deposit funds, or where full rent has been paid throughout?
Generally speaking, monies required to top up a rent deposit the landlord has drawn on to cover rent arrears will be a ‘protected rent debt’ and thus subject to the arbitration scheme. This is, however, only the case where the initial arrears would qualify as ‘protected rent debt’ (see 5 below).
Where full rent has been paid throughout then there will of course not be any rent debt to be dealt with via arbitration.
4. What is the position where the enforced closure/restrictions have eaten up a rent free period at the start of a new Lease?
In the circumstances where a tenant’s business has been adversely affected by coronavirus during a rent free period of a lease, then rent arrears will of course not have been incurred for that period. However, the objective of the arbitration process is essentially a balancing act between the interests of the landlord and the tenant; any award should be aimed at preserving, or restoring and preserving, the viability of the tenant’s business, but only insofar as this is consistent with preserving the landlord’s solvency. Where appropriate, to strike that balance, the arbitrator will take into account (among other things) the previous rental payments made by the tenant. Time will ultimately tell, and further guidance for arbitrators is not expected until passing of the Bill, but it may well be the case that the presence of a rent-free period since the beginning of 2020 adversely impacts the tenant’s ability to claim that relief is justified.
It is worth noting that, as part of the moratorium on certain remedies available to landlords prescribed by the Bill, landlords will be prevented from using a tenant’s deposit to cover outstanding debts throughout the duration of the moratorium period (being the date on which the Bill comes into force for a period of 6 months, or if the debt is referred to arbitration, the day on which the arbitration concludes).
5. Which types of debt are covered by the scheme?
The scheme applies to ‘protected rent debt’. ‘Rent’ in this context includes not only ‘pure’ rent but also service charges, interest and VAT. Rent becomes a ‘protected rent debt’ where it was due in circumstances where the tenancy was adversely affected by coronavirus and the rent is attributable to a period of occupation within the period beginning on 21 March 2020 and ending either:
- the last day on which closure of the business or of the business premises was mandated, providing that day is earlier than 18 July 2021; or
- in any other case, 18 July 2021.
6. How long will the arbitration process take to complete and is there a deadline for commencing an arbitration?
The specific timescales for undertaking the process are still somewhat uncertain, although it is clear that the government has intended for this to be a relatively quick process available for a limited time; the arbitration process must commence within 6 months of the date that the Bill comes into force (currently, this is intended to be 25 March 2022 although this may change and there is scope for the government to extend this deadline). In reality, however, much will depend on the availability of arbitrators (and indeed the number of approved arbitration bodies for the scheme), the extent of any backlog of applications that accrues and the extent of information requested during applications, for example.
7. If we can’t agree terms, what is it that the arbitrator actually has to decide?
The key question for the arbitrator is whether a tenant should be entitled to relief from payment of rent debts due to its landlord.
Of course, to answer that question, the arbitrator will first have to make a decision on a number of other points. Provided that the rent debts are ‘protected’ and the tenant’s business was adversely affected by coronavirus (that is, it was subject to a requirement to close its business or premises in whole or in part between 21 March 2020 and 18 July 2021), the arbitrator will need to consider:
- Firstly, whether the tenant’s business is ‘viable’ or would be if the tenant were to be given relief from payment of any kind. In doing so, the arbitrator must have regard to:
- The assets and liabilities of the tenant;
- The previous rental payments made to the landlord;
- The impact of coronavirus on the business of the tenant;
- Any other information relating to the financial position of the tenant that the arbitrator considers appropriate.
- If the arbitrator considers that the tenant’s business is viable, then they must consider whether the tenant should receive any relief from payment and, if so, what relief.
- In considering whether to grant relief to the tenant, the arbitrator must balance the aim of preserving the viability of the tenant’s business with the preservation of the landlord’s solvency. The arbitrator therefore needs to decide whether the grant of any relief to the tenant will threaten the landlord’s solvency. In doing so, they must have regard to:
- The assets and liabilities of the landlord; and
- Any other information relating to the financial position of the landlord that the arbitrators considers appropriate.
- At no point can the arbitrator consider the possibility of either the tenant or the landlord borrowing money or restricting their business.
Whilst the arbitrator is given a wide scope to make an award as they see fit, any relief which gives the tenant time to pay an amount (including by instalments), cannot extend the time for payment beyond 24 months beginning with the day after the day on which the award is made.
8. What type of evidence would either party need to provide to the arbitrator to support their proposals and would we have to provide commercially sensitive trading information? What if we do not want to given that information?
The nature and amount of evidence required will vary from case to case. However, the government has published the following non-exhaustive list of evidence to guide parties and arbitrators as to the types of evidence they may wish to rely on:
- existing and anticipated credit/debit balance
- business performance since March 2020
- tenant’s assets (noting that some may be liquid assets such as cash and other may be plant and machinery which cannot be sold without ending the business)
- position of the tenant with other tenancies i.e., ability to absorb the costs within those other tenancies
- government assistance received by the tenant including loans and grants (which may not have covered rent but provided some financial support to the business)
- dividend and bonus payments to shareholders
- excessive or unreasonable dividend payments to directors (having regard for the fact that director dividends may be the director’s only income during the ringfenced period)
- overdue invoices or tax demands
- unpaid or returned cheques or electronic payments
- exceeding overdraft limits
- creditor demands
- money judgments
- expert evidence received as to the tenant’s current trading position, e.g., from the tenant’s accountant
- shortfalls in share issues
- evidence of prior refusal of further credit, funding, or lending, (although the possibility that the tenant could obtain finance if it has not already applied for it is not to be considered a factor)
- failure to meet budget projections
- loss of important contracts
- insolvency of a major customer
- unexpected retentions - knowledge of a lack of working capital, or
- loss of key personnel or staff redundancy.
Ultimately, proposals by each party as to payment arrangements must be accompanied by supporting evidence, but there are no specific requirements as to what that evidence must consist of. However, when making their decision, the arbitrator must only have regard to the circumstances of each party ‘so far as known’ and it may well be that parties feel that they cannot adequately make their case without revealing sensitive information. In those circumstances, that party is somewhat stuck between the confused provisions of the Bill: on the one hand, the arbitrator must remove all confidential information from their awards which could significantly harm the business interests of the party to which it relates; but on the other, oral hearings themselves in which the evidence is to be put forward must be held in public unless the parties agree otherwise (which is unlikely where a party knows the other has evidence they will only rely on in private). Of course, it is likely that arbitrators will take a dim view of parties who refuse to have hearings in private where sensitive information is at play, but only time will tell how this conflict within the Bill will be dealt with.
Further, the mere fact that a tenant has commenced the arbitration process may be sensitive enough information and there is no provision within the Bill which suggests that this must not be made public by the landlord. It may therefore be the case that a great deal of time and expense is incurred agreeing confidentiality agreements before the arbitration process has even begun, although this would allow the opportunity to agree for any future hearings to be conducted in private.
9. What might the costs of the arbitration be?
As it stands, the position on costs are very unclear. One of the main aims of the process is to be a quicker, more cost-effective resolution than litigation. However, as you will have seen from the above, the process is nevertheless a rather involved one and is likely to require preparation for, and representation at, an oral hearing and perhaps the negotiation of preliminary agreements, raising questions of how much more cost-effective the reality will be.
Additionally, it is not yet clear what fees an arbitrator and arbitration bodies will be able to charge. The Bill does contain a power for the Secretary of State to impose limits on arbitration fees (which may operate on a sliding scale depending on the amount of protected rent debt in question), but it is not yet clear whether that will be done.
10. Can costs be awarded as part of the arbitration?
Initially, the party applying for the arbitration must pay the arbitration fees (being the fees and expenses, including any hearing fees, or the arbitrator themselves and any approved arbitration body concerned) in advance of the arbitration taking place.
At the end of the arbitration, the arbitrator may award responsibility for the arbitration fees as they consider appropriate in the circumstances of the case, although the general assumption will be that the applicant is to be reimbursed for half of the fees.
As to other costs (for example legal advice and representation), the parties are each responsible for their own costs and the arbitrator has no power to order otherwise. Additionally, an amendment has recently been proposed to clarify that any costs incurred in the arbitration process cannot be recovered under any existing clause in the lease and guarantors (or other third parties) will also benefit from any relief awarded. This will serve to ensure that the terms of the relief cannot be circumvented by a landlord trying to claim the full arrears after relief is awarded.