Covid-19 rent debts – details on the arbitration scheme and a new code

On 9 November the government introduced the Commercial Rent (Coronavirus) Bill (the Bill). The Bill:

• sets out a framework for the new legally binding arbitration scheme that will allow an arbitrator to write off in whole or part pandemic-related rent arrears and/or allow tenants time to pay; and
• details continued restrictions in relation to forfeiture, Commercial Rent Arrears Recovery (CRAR) and winding up petitions, and introduces new measures in relation to debt claims and rent deposits, for certain pandemic-related debts.

The government also published a new commercial rents code of practice (the New Code), which replaces the ‘Code of practice for commercial property relationships’ issued in June 2020. The New Code gives further guidance on the Bill and provides best practice principles to guide landlords and tenants who remain in dispute about rent arrears linked to the pandemic.

The government’s stated policy aim in relation to these unprecedented measures is to preserve otherwise viable businesses and the jobs they support.

The Bill and the New Code

Following on from earlier government announcements, the Bill introduces the concept of protected rent debt.

Only business tenants who were subject to forced closure during the pandemic will benefit from the new concept of protected rent debt. The proposed legislation in effect ringfences rent (which includes service charge, insurance costs, VAT and interest) relating to the period between 21 March 2020 and the date when the coronavirus restrictions for a business that had been forced to close came to an end. Note that the end date is not the date on which forced closure ended but the date on which restrictions ended that regulated the way in which the business could be run or the way in which the premises could be used. The last date for any business in England to fall within this protected period will therefore be 18 July 2021.

Where landlords and tenants are in dispute over a protected rent debt, provision is made for determination – by way of statutory arbitration – as to whether there should be relief from payment. It is proposed that this relief takes the form of one or more of the following:

• writing off the whole or part of the debt;
• giving time to pay, including payment by instalments (payment must be within 24 months of the award); and
• reducing (including to zero) any interest that would otherwise be payable by the tenant under the terms of the tenancy in relation to the whole or any part of the debt.

The landlord or the tenant may make a reference to arbitration within six months of the legislation coming into force, which is expected on 25 March 2022.

The Bill sets out a ‘pre-arbitration process’ that must be followed. The party wishing to arbitrate must send a letter of notification advising the other party of their intention to apply for arbitration. This should include a proposal to settle the unpaid protected rent debt. The other party has 14 days to respond, which can include a counter offer. The commencing party has a further 14 days to consider the counter proposal and, after those 14 days (or 28 days if no interim response has been received) have elapsed, either party can apply for arbitration. This application should include a formal proposal for settlement, together with supporting evidence. A counter proposal may be made by the other party. The arbitrator can make the award on paper or following a hearing (if requested) and any hearing should be within 14 days of the request for one.

The arbitrator should make a determination that is aligned with the ‘arbitrator’s principles’. The first of these principles is aimed at preserving (or restoring and preserving) the viability of the business of the tenant, so far as that is consistent with preserving the landlord’s solvency. Provided it is consistent with the tenant’s viability, the second principle is that, if a tenant can afford to meet its payment obligations, it should do so in full and without delay. Any manipulation by a party of its financial affairs is to be disregarded. No settlement must undermine the solvency of the landlord, and tenants are not expected to restructure or take on more debt. The New Code provides further commentary on the principles and states that lenders are expected to continue to demonstrate forbearance to their borrowers during the period in which the arbitration is in effect.

When an arbitrator makes an award, he must also make an award requiring the other party to the arbitration to reimburse the applicant for half of the arbitration/hearing fees it has paid (or such other amount as the arbitrator considers appropriate). Each side must otherwise meet their own legal and other costs. The Secretary of State may specify limits on arbitration fees.

The Secretary of State will be required to approve and publish a list of approved arbitration bodies, which will maintain a list of approved arbitrators and administer the process.

Arbitration cannot be used where the tenant that owes the protected rent debt is already subject to a CVA, IVA or scheme of arrangement in respect of that debt. Equally, a CVA, IVA or scheme of arrangement cannot be proposed for 12 months in relation to a protected rent debt which has been successfully referred to arbitration.

Nothing in the Bill prevents landlords and tenants from reaching agreement (and indeed this is strongly encouraged). Where landlords and tenants have already reached a legally binding agreement, the Bill does not allow for those existing agreements to be reopened and determined by arbitration.

For those who are negotiating or undertaking arbitrations, the New Code encourages the following behaviours: transparency and collaboration, a unified approach, acting reasonably and responsibly, and a swift resolution.

Landlord’s remedies for unpaid rent

Currently restrictions on a landlord’s right to forfeit and the use of CRAR are in place until 25 March 2022 (unless legislation is passed ahead of this). These measures apply to all businesses and are not sector specific. In addition, until 31 March 2022, commercial landlords cannot present a winding up petition in respect of "rent, or any sum or other payment that a tenant is liable to pay" under a business tenancy and "which is unpaid by reason of a financial effect of coronavirus".

The Bill contains provisions which, once it is enacted, will prevent a landlord who is owed a protected rent debt from taking certain actions during a moratorium period (which will run from the date the Act is passed and remain in place until any arbitration has concluded or the six-month window has expired with no arbitration having been commenced).

In relation to a protected rent debt, a landlord will be prevented from:

• Making a debt claim in civil proceedings: Prior to the Bill being announced, debt recovery proceedings have remained available and some landlords have successfully pursued this route. Although there are some claims that have been defended unsuccessfully at first instance and that are now subject to appeal. Most existing claims will not be caught by this provision but the Bill contains a retrospective measure that will allow for debt claims issued on or after 10 November 2021 to be stayed.
• Using CRAR
• Enforcing a right of re-entry or forfeiture
• Using a rent deposit: There have been no restrictions on the use of rent deposits to date and, until the Bill becomes law, rent deposits can still be drawn down against. However, tenants will not be required to top up their deposits until the conclusion of the arbitration process or the six-month window to commence it (if not commenced). If the sums drawn down fall within the relevant period covered by the arbitration then they can still be considered in the arbitration and it is likely that credit will need to be given for any concessions that are subsequently awarded to a tenant by an arbitrator.
• Presenting winding up and bankruptcy petitions.

Once the above is in effect, previously restricted remedies will be available in respect of debts owed that do not fall within the scope of the above.

It is worth noting that the Code states that “further guidance to assist arbitrators, alongside more specific guidance for landlords and tenants on the details set out in the Commercial Rent (Coronavirus) Bill, will be published once the Bill has passed through parliament”.

The government has asked those with relevant expertise and experience or a special interest in the Bill to submit views in writing to the House of Commons Public Bill Committee. The first sitting of the Public Bill Committee is expected to take place on Tuesday, 7 December, and the Committee is scheduled to report by Thursday, 16 December.