Staving off the cliff-edge or storing up more problems for landlords and tenants? - The Rent Recovery Arbitration Scheme

Following the end of recent government coronavirus measures, and in particular the expiry of the moratorium on forfeiture for unpaid rent and restrictions on exercising CRAR, Commercial Rent Arrears Recovery, the Commercial Rent (Coronavirus) Bill is set to bring order to the effect of the pandemic on both landlords and tenants.

Commercial rent arrears are and will continue to be a significant issue for both landlords and business tenants as we emerge from the pandemic. In an effort to deal with rent arrears pragmatically, the Government has devised a process for landlords and tenants to negotiate a method of repayment through guided arbitration rather than allowing the debt to become immediately enforceable.

What will the Bill cover?

The Bill is now at its second reading in the House of Lords and is intended to come into force in March 2022 along with a new Code of Practice for Commercial Property Relationships. Its purpose is to support landlords and tenants in resolving disputes relating to rent owed by businesses which were required to close during the Covid-19 pandemic.

The new legislation will relate to ‘protected rent arrears’ which are governed by the following criteria:

1. The arrears arise from a business tenancy - covering both corporate and individual tenants.
2. The business/premises were required by law to close fully or partially under Covid-19 regulations any time from 2:00pm on 21 March 2020 to 11:55pm on 18 July 2021 in England or 6:00am on 7 August 2021 in Wales. Where businesses were permitted to operate but subject to limitations, such as earlier closing times, or restaurants operating under the 'rule of 6', this will count as the business/premises having to close for the purposes of qualifying as protected rent arrears."
3. The arrears relate to the relevant period. Where rent due only partly falls within the relevant period, then only the rent due within that period can be classed as protected rent. Any rent due falling outside of the relevant period will not be classed as protected rent. This may create situations where part of a quarter rent falls within protected rent and part falls outside, meaning the rent will have to be prorated to allow for the correct figure to be determined.

Notably, the definition of ‘protected rent arrears’ extends beyond rent itself to:

• service charges - which is broadly defined;
• payments towards insurance premiums;
• interest on the unpaid rent amount including VAT; and
• any amount drawn down by the landlord from a tenancy deposit to meet part or all of the rent, unless repaid by the tenant"

These sums combined will create the ‘full debt’. There are currently no restrictions on pursuing sums falling outside of the definition of ‘protected rent arrears’, such as dilapidations, by court proceedings, enforcement or winding up proceedings.

The Bill will enable arbitration to be used as the method for resolving disputes with approved arbitrators being accredited by the Secretary of State. A statutory arbitration process will be applied and allow both tenants and landlords to state their case. The arbitrator will then consider the principles of both cases before making an award, which will revolve around relief from payment and could include potentially writing off the whole or part of the debt or giving time to pay including via instalments. This could also include relieving the tenant from repaying any shortfall from a deposit being drawn down as the drawn down deposit falls within the ‘full debt’ therefore allowing the arbitrator to make a decision on repayment.

What will the arbitrator consider?

The arbitrator will consider both viability of the tenant and the solvency of the landlord, with any award aiming to preserve and restore the viability of the business of the tenant so far as that is consistent with preserving the landlord’s solvency.

In assessing the viability of the tenant’s business the arbitrator would have regard to:

• Its assets and liabilities including any other tenancies to which the tenant is a party,
• The previous rental payments made under the business tenancy from the tenant to the landlord,
• The impact of coronavirus on its business, and
• Any other information relating to the financial position that the arbitrator considers relevant.

In assessing the solvency of the landlord, the arbitrator must have regard to:

• Its assets and liabilities, including any other tenancies to which the landlord is party, and
• Any other information relating to the financial position of the landlord that the arbitrator considers relevant.

The arbitrator will have a difficult job of balancing the needs of both the landlord and tenant especially where they are subject to multiple tenancies across a variety of sites. The viability of a business is also very sector specific, with Covid-19 having had various degrees of impact and therefore caution will need to be applied when considering the parties’ current and ongoing circumstances.

Comment

There is some debate that the Bill will be more onerous on landlords than tenants as the Bill will prevent landlords who are owed protected rent debt from using any method other than arbitration for six months after the Act is passed, or sooner, if the arbitration has concluded. There is also a possibility that this period could be made extendable, allowing tenants more breathing space but landlords a longer period without payment. Landlords will however be able to present winding-up petitions in relation of debt owed which is not classed as protected rent debt.

Further uncertainty has been raised over whether the awards will extend to guarantors; so far no comment has been made on this within the Bill. However, it appears to only be reasonable for provisions to be made to extend the benefits to guarantors and this is something to be considered at later stages.

It is to be seen that this will be a rigorous task for the arbitrator as well as both landlords and tenants especially with the future remaining uncertain and the effects of Covid-19 still being felt for many businesses.

If you have any questions or queries about the article above, please contact our Restructuring & Insolvency team