New binding arbitration process introduced to manage recovery of pandemic commercial rent arrears

New binding arbitration process introduced to manage recovery of pandemic commercial rent arrears

(First published March 2022 by Osborne Clarke authors)

New moratoriums on enforcement measures put in place while arbitrations are ongoing – but it is unclear how much take-up there will be of the process

From 24 March 2022 it will be all change for the recovery process of rent arrears that have accrued since the start of the Covid-19 pandemic in the UK over two years ago. It marks the end of a number of moratoriums that were put in place at the start of the first lockdown, and which have subsequently been extended, as well as the commencement of a new arbitration scheme to deal with rent debt accrued during successive lockdown periods.

A large number of landlords and tenants have already agreed terms to deal with pandemic-related arrears but with an estimate of between £7 billion and £9 billion in rent debts, largely in the retail and leisure sectors, there is still a significant amount of arrears to be settled.

But will the measures be enough to reset the balance and avoid a spike in insolvencies?

End of moratoriums 

The moratorium on forfeiture of commercial leases and exercising Commercial Rent Arrears Recovery (CRAR) ends on 25 March 2022, and protection against winding-up petitions (in certain circumstances) will end on 31 March 2022.

Landlords can therefore begin to use these remedies again for debts and tenancies that fall outside the scope of the Commercial Rents (Coronavirus) Act 2022.

These remedies will be especially useful where commercial tenants have continued to withhold rent payments after the end of all lockdown periods (18 July 2021 in England and 7 August 2021 in Wales). Landlords will no longer need to rely on the more expensive and lengthy process of issuing debt claims.

Commercial Rents (Coronavirus) Act

The Act, which received royal assent on 24 March 2022, provides a mechanism for the assessment of, and relief from, certain rent debts through a binding arbitration process. The Act also puts in place new moratoriums while the arbitration process is ongoing.

Which tenancies does the new Act apply to?

The Act applies to all business tenancies as defined in the Landlord and Tenant Act 1954 (including those leases which have been contracted out of the 1954 Act). It does not apply to licences, tenancies at will, agricultural holdings, tenancies of less than six months and other specific types of lease.

What sums are protected?

The protected "rents" include rent, service charge, insurance rent, interest and any amount drawn down from a rent deposit and not yet topped up.

The tenancy must also have been adversely affected by the pandemic which means that it was mandated by the government to close its premises or cease trading (in whole or in part) during what is known as the "Protected Period". The Protected Period is from 21 March 2020 until the end of the relevant closure restrictions for the business in question (with a back stop date of 18 July 2021 in England, or 7 August 2021 in Wales). Any periods within that window when that business was able to open partially or was subject to any restrictions, will be ignored. A code of practice published by the government contains a helpful annex with a table detailing the specific closure dates for different businesses taking into account different tiers of lockdown 

The rents which accrued during the Protected Period are referred to as a "Protected Rent Debt" and are ringfenced by the Act and subject to the arbitration process.

The arbitration process

The arbitration process starts by either party, within six months from the date the Act is passed (by 24 September 2022), serving a pre-application "Letter of Notification". This notifies the other party that it wishes to arbitrate and must include a proposal with supporting information to settle the unpaid Protected Rent Debt.

The responding party will then have an opportunity to accept or respond with a counter-proposal. After that the initiator can consider any counter-proposal and then either party can apply for arbitration.

After the application has been submitted by one party, and once the appointed arbitrator confirms the case is eligible, the other party has 14 days to submit their own proposal before "best and final" offers are submitted by either party.

The parties may then choose to have a hearing, which the arbitrator will seek to conduct within 14 days. Alternatively, if no hearing is requested, the arbitrator can make an award simply on the papers submitted.

The arbitrator will consider the principles of viability and affordability in the new code (see below) when making its award. The award will be published, with confidential information taken out.

If the tenant is granted relief from payment (in the form of all/part of the debt being written off; an instalment payment plan being granted; or a freeze or reduction in interest charges), all payments must be made within 24 months of the award. Rights of appeal are very limited, as with any arbitration.

The finer details around the arbitration process, including who the approved arbitration body are and what the fees will be, are yet to be confirmed. It is therefore likely that the period for referral to arbitration will be extended beyond the initial six months.

What effect does the Act have on other remedies?

The Act introduces a further temporary moratorium on a number of remedies, which essentially "pauses" any enforcement action or court procedure in relation to the Protected Rent Debt. The moratorium enforced by the Bill will last for six months (until 24 September 2022) or, if the case is referred to arbitration, when that process is finished.

During this time, landlords will be unable to take any action in relation to Protected Rent Debt including:

  • exercising CRAR;
  • forfeiture;
  • drawing down on a rent deposit (where a drawdown has occurred before the Act is passed, the tenant is not required to top up the deposit);
  • winding-up petitions (where the statutory demand was served on or after 10 November 2021); or
  • issuing court proceedings. 

Where proceedings were issued on or after 10 November 2021, either party can apply to stay these so long as the debt is within the scope of the Act.

Code of practice

In November 2021, the government also published an updated code of practice which replaced the one first issued on 19 June 2020. It represents best practice and applies to all commercial leases held by businesses with rent arrears accrued due to the impact of coronavirus, so goes wider than the scope of the Act.

Its aim is to encourage collaboration between landlords and tenants and it explains further detail on the arbitration process. It replicates the principles of the Act that the parties must take into account such as the viability and affordability to any settlement, and encourages transparency in all negotiations. 

Osborne Clarke comment

The end of the current restrictions will be welcome news for landlords with tenants who have continued to withhold rent since the June 2021 quarter. As the UK gets back to "normal", it seems fair that tenants should continue to meet their lease obligations. For landlords, there will be frustration that one of the outcomes from the Act is that the final remedy that had been available over the last two years (issuing a debt claim) has been removed in respect of Protected Rent Debts.

However, the restrictions had been a welcome protection for tenants who have struggled to rebuild their businesses to pre-pandemic levels. With the rapidly rising costs of goods, logistics and utilities, it is likely that many tenants will continue to struggle to pay rent and other lease charges. An increase in tenant insolvencies, especially in the retail and leisure sectors, is expected during 2022.

It will be interesting to see what the take up is for the arbitration process. With so many details still be confirmed, it may be that both landlords and tenants will use the threat of an imposed decision, potential further delays and the guidance set out in the Act and the code, to leverage settlement negotiations.

About the authors

With thanks to OSBORNE CLARKE for allowing us to share articles & blogs from various leaders and employees

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