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Insights - 09/12/2021

New Commercial Rent Arbitration Bill: Resolving the COVID-19 Commercial Rent Hangover?

The Commercial Rent (Coronavirus) Bill1 (the “Bill”) was introduced into Parliament on 9 November 2021 together with a new Code of Practice.  It is hoped the Bill will be passed by the government towards the end of March next year and will include a legal avenue for tenants and landlords in relation to the resolution of unpaid rent debts as a result of the pandemic.

The Code of Practice2 accompanies the Bill and sets out guidance for the parties.  There is an emphasis on landlords and tenants acting reasonably and responsibly and working together, effectively sharing the burden of cost of the pandemic to ensure a swift resolution.

What is the Bill’s purpose?

The main attraction of the Bill is the commercial rent arbitration scheme, designed to deal with unpaid rent arrears that have accrued during the pandemic as a result of mandated business closures – called “Protected Rent Debt”.  This includes rent, service charges and insurance where this is paid to the landlord or a representative.

According to the government, the aim of the new legislation is to have Protected Rent Debt resolved by mutual agreement between the landlord and the tenant or, if they cannot agree, then by the arbitration scheme set out in the Bill.

What are the commercial rent arbitration provisions under the Bill?

Where the tenant and the landlord under a business tenancy are unable to agree the terms for repayment of Protected Rent Debt either of them may refer that dispute to arbitration.

The party wishing to initiate the commercial arbitration must send a letter of notification with their proposals and evidence to settle the Protected Rent Debt.  The other party can then accept the offer or make a counterproposal within 14 days.

If settlement is not reached, a referral can be made to an approved arbitration body who will appoint an arbitrator or a panel of arbitrators to deal with the matter.  The referral must be supported by evidence and the other party has the opportunity to make a counterproposal.

The Commercial Rent Arbitration Deadline

The reference to arbitration has to be made “within the period of six months beginning with the day on which this Act is passed” (Section 9(2)), so it is important that referrals are made as soon as possible.

The Bill sets out principles that the arbitrator must consider:

  1. The award should be 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; and
  2. The tenant should be required to meet its obligations as regards the payment of the Protected Rent Debt without delay (so far as this is consistent with 1.)

The parties are also able to request an oral hearing which must be held within 14 days beginning with the day on which the arbitrator receives a request.  Otherwise, the arbitrator will consider the matter on paper.

The outcome and decision of the arbitration is binding on both parties.  The ability to appeal against the decision is very limited i.e. on the basis that the arbitration scheme was not applicable.

The arbitrator must make an award requiring the other party to the arbitration to reimburse the applicant for half of the arbitration fees or such other amount as the arbitrator considers appropriate in the circumstances of the case. Otherwise, parties to an arbitration must pay their own legal or other costs.  There does not seem to be any provisions within the Bill allowing the arbitrator discretion to make a costs award against another party, for example, if one party behaved unreasonably during the arbitration.

Conclusion

In summary, the Bill provides a form of resolution for landlords in seeking to recover Protected Rent Debt, but even with this determination, it may still take time for landlords to receive payments as the tenant could be allowed up to 24 months to pay the Protected Rent Debt.  It will therefore be a while before there is a return to relative normality but there is an element of certainty that landlords will get paid in the long run.

However, there may be further frustration for landlords as they will be unable to present winding up petitions relating to Protected Rent Debt.  The Bill contains temporary provisions in relation to winding up petitions at Schedule 3.  This is an extension to the current moratorium in place under Schedule 10 CIGA 2020.

As for tenants, the granting of an award could help to provide some certainty as regards planning cashflow and also relief that any Protected Rent Debt remains protected for now, helping to ensure the viability of their businesses.

Further, the arbitrator will have a wide discretion as to the order he/she will make and as such, two arbitrators given the same set of facts, could decide on two different awards, but such decisions will not create authority to bind others.

The purpose of the Bill appears to be to offer protection to businesses that as a result will be less vulnerable to legal action from their landlords.  The arbitration process may encourage tenants to resolve their debts owed to their landlords to obtain certainty on repayments as opposed to being in fear of legal action being taken at some point.  However, it is possible that the costs of the arbitration process could be unappealing, but this could result in parties agreeing payment plans amongst themselves.

As for landlords, one of the benefits of the arbitration process is that it will identify and scrutinise the tenant’s ability to pay as full and frank disclosure will be required.  However, it does seem to be that there is further limitation to the action landlords can take and an emphasis on landlords and tenants working together which may lead to more negotiated settlements.  This likely means that the landlords will be the ones to suffer as a result.

It will be interesting to see how the legislation is finalised and subsequently put into practice.

If you would like to discuss the issues raised in this article please contact the Dispute Resolution team at Morrisons by getting in touch with your usual advisor or emailing Matthew Hearsum on [email protected]

1https://publications.parliament.uk/pa/bills/cbill/58-02/0189/21189.pdf

2https://www.gov.uk/government/publications/commercial-rents-code-of-practice-november-2021/code-of-practice-for-commercial-property-relationships-following-the-covid-19-pandemic


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