The Commercial Rent Arrears (Coronavirus) Bill - a route map to new normal

The Government has now published the long-awaited Commercial Rent (Coronavirus) Bill  which contains details of the proposed arbitration scheme intended to deal with unpaid rent arrears accrued during the pandemic. 

This is accompanied by a Code of Practice which contains guidance on how parties are expected to conduct themselves in relation to the negotiations.  The Code of Practice is applicable from 10 November 2021 and the parties are expected to abide by it even in situations where the rent arrears fall outside the scope of the arbitration scheme. 

The arbitration scheme only applies to “protected rent debt” which is defined as rent and other sums accruing under a business tenancy during any period when the business was forced to close (in full or in part) by government regulations. Rent includes service charges, VAT and interest if payable under the terms of the lease.  Different business sectors were subject to different periods of closure commencing on 21 March 2020 and the Code of Conduct therefore sets out a helpful timeline for ease of reference at Annex A.  However, in broad terms for most retail business the relevant period is 21 March 2020 until 12 April 2021 and for hospitality businesses, 21 March 2020 until 18 July 2021.  For the purposes of calculating a period of closure, the fact that a business was allowed to open to for click and collect is disregarded. 

Either the landlord or the tenant can refer a dispute over payment of a protected rent debt to arbitration and once one party has done so the other is bound by the outcome.  Any agreement reached prior to the Bill becoming law will be binding. 

All arbitration bodies must be approved by the Secretary of State and all arbitrators must have suitable qualifications and experience and be independent of the parties.

The process

The Bill sets out a pre-action phase during which either party may state their intention to refer the dispute to arbitration and put forward proposals to the other party supported by evidence including details of their financial position. The other party may put forward counter proposals within 14 days.  If an agreement cannot be reached either party may refer the dispute to arbitration not less than 14 following receipt of the response.  However, the ability to make the referral is strictly limited to a period of six months from the date that the legislation comes into force.

The party making the referral must submit proposals supported by evidence and the other party may make counter proposals also supported by evidence within 14 days.  Evidence must be supported by a statement of truth.  Both sides may summit revised proposals within a further 28 days.  These time limits can be extended with the agreement of the parties or the permission the arbitrator.

At this point and based upon the information provided by the tenant, the arbitrator must make a decision regarding the viability of the tenant’s business.  If the arbitrator concludes that the tenant’s business is not viable and would not be viable even if the tenant is given relief from the protected rent debt, he must dismiss the reference.

If the arbitrator concludes that the tenant’s business is viable or would be viable if relief were to be granted he must make an award.

The arbitrator’s award

The arbitrator must consider which of the parties’ proposals best satisfies the principles set out in section 15.  These are:

1. Preserving or restoring the viability of the tenant’s business in such a way that is consistent with maintaining the solvency of the landlord, and
2. The tenant should, so far as it is consistent with the principle in paragraph a. to do so, be required to meet its obligations as regards the payment of protected rent in full and without delay.

The parties may request an oral hearing in which case the arbitrator must make his decision with 14 days of the conclusion of the hearing.  It is open to the arbitrator to make no award at all in favour of the tenant but if he makes an award giving the tenant time to pay a protected rent debt, the final payment must be made within 24 months of the date of the award.

Insolvency aspects

• No referral to arbitration may be made if the tenant is subject to an Individual Voluntary Arrangement (IVA), a Company Voluntary Arrangement (CVA) or a Scheme of Arrangement under the Companies Act 2006 which includes a protected rent debt.
• Once a referral to arbitration has been made, no arbitrator may be appointed and no proposals may be made by either party if either an IVA, CVA or Scheme of Arrangement, which include a protected rent debt, have been proposed and are awaiting a decision.
• Once an arbitrator is appointed, for a period of 12 months from the date that the award is made no IVA, CVA or Scheme of Arrangement may be made which includes a protected rent debt.
• Schedule 3 of the Bill sets out temporary provisions relating to the issue of winding up and bankruptcy petitions.
• A moratorium period is defined as the period commencing on the day the legislation comes into force and (a) where no reference to arbitration is made, ending on the last day for making a referral to arbitration (six months later) or (b) where a referral to arbitration is made, the date arbitration is concluded either by the making of an award or dismissal/withdrawal of the reference. During the moratorium period no winding-up petition may be presented in respect of a protected rent debt.
• For the purposes of bankruptcy proceedings Schedule 3 also defines “relevant period” as the period commencing on 10 November 2021 and ending (a) where no reference to arbitration is made, on the last day for making a referral to arbitration (six months later) or (b) where a referral to arbitration is made, the date arbitration is concluded either my the making of an award or dismissal/withdrawal of the reference.
• A landlord may not issue a bankruptcy petition based upon non-compliance with a statutory demand relating to a protected rent debt served during the relevant period.
• A landlord may not issue a bankruptcy petition based upon non-satisfaction of a judgment debt where the proceedings related to a claim for payment of a protected rent debt and were issued during the relevant period.
• If a bankruptcy petition is issued in contravention of these provisions the court has power to make such order as it thinks fit for restoring the position to what it would have been had the petition not been issued.
• If a bankruptcy order is made on or after 10 November 2021 in circumstances where the order would not have been made had the legislation been in force, the court is regarded as having no power to make the order and the order is accordingly void. In these circumstances the court has power to make such order as it thinks fit for restoring the position to what it would have been had the order not been made.

Other restrictions during the moratorium period

• The landlord may not issue court proceedings to recover a protected rent debt during the moratorium period.
• If the landlord issues court proceedings to recover a protected rent debt on or after 10 November 2021, either party may apply to the court to stay the proceedings and the court must then grant a stay.
• If judgment is obtained in respect of such a claim after 10 November 2021, it may not be enforced until the end of the moratorium period and may be referred to arbitration. Reference to the judgment may be removed from the register of County Court judgments.
• A Landlord may not use CRAR to recover a protected rent debt during the moratorium period, nor forfeit the lease during the moratorium period for non-payment of a protected rent debt.
• Where a tenant makes a rent payment to the landlord either during the moratorium period or during the period beginning with the date businesses were allowed to re-open up to the start of the moratorium period and the tenant did not exercise its right to appropriate the payment against any particular rent debt, the landlord must not appropriate the payment against a protected rent debt.
• As drafted the Bill states that a landlord may not during the moratorium period draw against a deposit in respect of an “unpaid rent debt”. If the landlord has done so before the commencement of the moratorium period he may not ask for the deposit to be topped up during the moratorium period.  It is not clear whether the reference to unpaid rent debt is a mistake and should refer to a protected rent debt.  No doubt this will be clarified before the Bill passes into legislation.

The Code of Practice

The Code of Practice for commercial property relationships following the Covid 19 pandemic (the Code) was published on 9 November 2021 and became effective from that date.

The Code is intended to be used by any business to help them negotiate and resolve rent disputes even where they fall outside of scope of the new arbitration process.  It is likely that failure to adhere to the Code will have costs consequences for the defaulting party in the event of court proceedings.

The Code states that, where it is affordable, a tenant should aim to meet its obligations under the lease in full. It makes clear that the preservation of the tenant business’ viability should not come at the expense of the landlord’s solvency. However, it also explicitly states that tenants should never have to take on more debt or restructure their business in order to pay their rent.

The Code provides guidance on how parties should approach negotiation, with the intention that where possible they should resolve rent disputes before the Bill comes into force.  The parties are expected to exhibit the following behaviours;

1. Transparency, collaboration and good faith, recognising that both have an interest in business continuity.
2. Endeavouring to help and support each other in their dealings with stakeholders including government, utility companies, banks, financial institutions, and others to achieve outcomes reflecting the Code’s objectives, and to help manage the economic and social consequences of the pandemic.
3. Acting reasonably and responsibly in order to identify mutual solutions.
4. Acting swiftly to achieve a resolution without recourse to costly and onerous processes.

Comment

Whilst the Code makes it clear that the solvency of the landlord should not be jeopardised by an award made by the arbitrator in respect of a protected rent debt, there is no doubt that the arbitration scheme and the raft of restrictions on landlords’ ability to recover a protected rent debt make this a very tenant friendly piece of legislation.  The reason for this can be gleaned from the Code insofar as this makes reference to managing the economic and social consequences of COVID-19.  In other words, there is a recognition that it is the interests of the wider economy, including job retention, for viable business to be given the best opportunity to survive.

Landlords may take some comfort from the fact that any deferred payments of protected rent debt must be paid within 24 months of an arbitrator’s award and the fact that a referral to arbitration must take place within six months from the legislation coming into force.  On the basis that the legislation is expected to come into force by 25 March 2022 we can expect a return to something like normality by the autumn of 2022.  However, if the Code or aspects of it remain in place beyond that date, it may be a new normal.