The Government has now announced, in the form of the Commercial Rent (Coronavirus) Bill, proposed new laws and a further Code of Practice with the objective of resolving remaining commercial rent arrears accrued during the COVID-19 pandemic.
Commercial landlords and tenants will by now be familiar with the existing restrictions placed on the enforcement of rent arrears since the start of the pandemic. As well as a ban on arrears based forfeiture (in place until 25 March 2022), the Government has also restricted insolvency procedures, including the issue of winding up petitions and the use of Commercial Rent Arrears Recovery (CRAR). In addition, a Code of Practice for Commercial Property Relationships was published very early on in the pandemic with the objective of encouraging landlords and tenants to co-operate and negotiate “affordable rental agreements” to ensure the survival of those tenants experiencing “severe hardship”.
The Commercial Rent (Coronavirus) Bill will, if enacted, “ringfence” Covid related rent arrears and establish a binding arbitration system for those debts that cannot be resolved by agreement in accordance with the new Code. This note briefly summarises the major changes to the existing position and how the new measures will operate in practice.
The Commercial Rent (Coronavirus) Bill applies to rent debts where:
- The tenant was mandated to close their premises or cease trading; and
- The lease is a business tenancy, as defined by Part II of the Landlord and Tenant Act 1954; and
- The rent accrued during the “ringfenced period”. This is the period from 21 May 2020 (when the first restrictions on businesses were established) until the end of the relevant restrictions for the business in question. For example, for nightclubs in England, the end date is 18 July 2021.
If passed, any debt claims that include “ringfenced” arrears and which are issued between 10 November 2021 and the Bill coming into force will be stayed. Specifically:
- all ringfenced debt under these claims, and any County Court or High Court judgement made in respect of them will fall within the scope of the binding arbitration process (see below).
- Landlords will not be able to issue debt claims for ringfenced arrears altogether until the end of the arbitration application period or the arbitration process.
- Landlords will be prevented from petitioning for bankruptcy of a business tenant based on a statutory demand for any ringfenced debt served on or after 10 November 2021 and before the Bill comes into force.
- Landlord will not be able to draw down on tenancy deposits to cover ring fenced arrears.
The key function of the Bill is to prevent further debt actions and to bring all efforts to resolve rent arrears within the scope of the new Code or the arbitration process. While the ongoing restrictions will be unwelcome to landlords, the scope of the Bill should provide some welcome news in providing some clarity on the extent of outstanding debts that will receive protection. For debts outside of the Bill’s scope, ie outside of the ringfenced period, landlords will be able to exercise their ordinary remedies in the ways they did prior to the introduction of the moratorium (although parties are encouraged to adhere to the principles of the new Code as set out below).
The new Code
The original Code was published quickly to encourage reasonableness at a turbulent and uncertain point when the Covid picture was changing daily. Whilst the spirit of co-operation set out in the Code has been adopted by many, the Code was voluntary and landlords had no legal obligation to agree to rent concessions. Some landlords have opted to pursue arrears through the Courts and have been successful in obtaining judgments although, for many, the challenges with enforcing such judgments meant that this was not an attractive or viable route.
It is clear that, despite a return to semi-normality, the Covid rent arrears hangover will continue for some time and the Government has now opted to replace the Code with a more structured framework for the negotiation of concessions and resolution of remaining disputes. The new Code sets out more explicitly the following behaviours to be exhibited by landlords and tenants:
- transparency and collaboration
- a unified approach
- acting reasonably and responsibly
- a swift resolution.
The new Code’s core principles are based on the preservation of viable businesses and greater transparency from those business tenants on the affordability of proposed concessions. Whilst the Code does not attempt to impose a general definition of a “viable” business, the crucial test it sets is “whether ring-fenced debt aside, the business has, or will in the foreseeable future have, the means and ability to meet its obligations and to continue trading”.
A common stumbling block in negotiations between landlords and tenants under the old Code was the tenant’s perceived failure to provide sufficient evidence of their inability to pay the contractual rent or proposed concessionary rent. The new Code explains clearly that where a viable tenant is seeking to deviate from the terms of the lease in respect of rent owed, they will need to demonstrate why the payment is unaffordable and what payment or payment period might otherwise be affordable in the near future. It also provides a non-exhaustive list of the documents which could be used as evidence of affordability.
Crucially, although landlords and tenants are not obliged to negotiate rent concessions under the new Code, if agreement is not reached, either party can unilaterally apply for the matter to be referred to the binding arbitration scheme introduced by the Bill.
The process will be split into stages, starting with a pre-application “letter of notification” by either party including a proposal for the settlement of the arrears in line with the new Code. The other party will then have the opportunity to accept or respond with a counterproposal. If this exchange does not result in agreement, an application for arbitration can be made which must include the notification sent during the pre-application stage, a proposal for resolution and relevant supporting evidence - including on viability and affordability in the case of a tenant.
The other party will then have 14 days to submit their own proposal, together with any supporting evidence following which the parties will have the opportunity to submit revised proposals for what the arbitrator’s award should be.
The parties will have the option to request a public hearing for the arbitration which the arbitrator will seek to conduct within 14 days, lasting not more than six hours. If no request is made, the arbitrator will consider the matter based on the documentation provided. The public nature of such hearings will undoubtedly generate great interest where they involve large retailers. While the decisions will not set precedents, the nature of the information shared in the hearings would provide useful material to other landlords dealing with the same retailer. Large retailers may therefore be discouraged from engaging in public hearings.
The parties will be notified of the award made within 14 days of a hearing and the arbitrator’s award will be legally binding. When deciding what award to make, the arbitrator will assess the proposals submitted by the parties in accordance with the principles of viability and affordability set out in the new Code. If the arbitrator considers one of the proposals to be in accordance with those principles, he or she will have to make an award on those terms. However, if both proposals are in accordance with the principles, he or she will opt to apply whichever is most consistent. Only if neither are deemed to be in accordance with the new Code will an arbitrator be able to make some other award.
The fees payable for arbitration will be set by the approved arbitration bodies and payable in advance. The Secretary of State will have power to set limits of fees which are expected to be variable; with a sliding scale, relative to the level of arrears. The Government hopes that the Bill will be enacted prior to 25 March 2022.
The clear objective of the Bill and new Code is to deliver a streamlined and speedy process for resolving remaining Covid related rent arrears. By removing the right to sue for arrears and bringing the determination of disputes within one procedural domain, the hope is that those arrears that have not been dealt with by agreement or judgment can finally be put to bed.
For landlords, by shutting the door on court proceedings for rent arrears, the Government has effectively removed what was their last remaining enforcement option. However, the principles set out in the new Code do provide for more stringent testing of a tenant’s ability to pay and the introduction of a unilateral application for binding arbitration will allow affordability to be independently assessed, in theory expediting recovery of at least some arrears for those that were reluctant to initiate full proceedings. In addition, the clear message that non-ringfenced arrears will be subject to the ordinary enforcement measures post March 2022 will be welcome news to landlords concerned at the prospect of tenants using the existing measures to avoid payment of rent for periods when they were not forced to close.
Tenants now have comfort that their ability to pay will be subject to fairer scrutiny and are less vulnerable to perceived strong arm tactics from landlords. However, those that were perhaps able to pay but were taking advantage of the relative safety afforded by the various restrictions will know that there are now no hiding places and that the arbitration process will require their full and frank disclosure of their financial position.
It will be interesting to see the level of demand for this new process. On the one hand, for tenants who are genuinely struggling, a potentially expensive arbitration process would presumably be unattractive. Likewise landlords who have come this far without agreement, might consider the process to be overly cumbersome and expensive, instead settling for a payment plan or other resolution – perhaps that is the whole point. However, there are likely to be many tenants who, when faced with potential Court proceedings from landlords unwilling to agree concession agreements during the pandemic, felt forced into agreeing payment plans they could ill afford. Might the new process encourage those tenants to rip up the agreements and seek to arbitrate in the hope they’d achieve a fairer deal?
With a radical new system such as this, there will inevitably be teething issues, not least in respect of how consistently the principles of viability and affordability are applied by the arbitrators. Also, given their power to deviate from the parties’ proposals, will we see a raft of appeals?
In any event, this is a clear attempt by the Government to force any remaining disputes to a conclusion and provide a more equal platform for doing so. As we emerge from the pandemic and back to reality, that is a crucial step in securing long term harmony in the commercial property sector.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2021