On 9 November 2021, the Government introduced the Commercial Rent (Coronavirus) Bill (the “Bill”). It also simultaneously published an updated version of its Code of practice for commercial property relationships following the COVID-19 pandemic (the “Code of Practice”).
The key provisions in the Bill relate to:
- A new mandatory arbitration process to determine what should happen to the rent debts built up by businesses who have been forced to close during the pandemic; and
- The extension of the various moratoriums currently in place in relation to the recovery of commercial rents (and the addition of new ones).
The Code of Practice explains how the Government expects the Bill to work in practice and also confirms that the Government expects parties to continue to try and resolve any rent debt disputes before the arbitration scheme is introduced.
In the following, we provide a summary of the key provisions in the Bill. However, it is important to note that, at the moment, we only have draft legislation - the Bill could be amended by Parliament, before it becomes binding legislation
Mandatory Arbitration Process
The Bill provides that “protected rent debts” can be referred to an arbitrator who is then entitled to grant “relief from payment”. Whether or not a tenant is entitled to relief from payment will be dependent on a number of factors.
What are “protected rent debts”?
A “protected rent debt” is a rent debt which has arisen where:
- A tenant was subject to a Government closure requirement at some point; and
- The rent debt is attributable to a period of occupation by the tenant within the “protected period”
The “protected period“ is a period beginning on 21 March 2020 and ending on the last day on which the business was subject to either a closure requirement or a “specific coronavirus restriction, subject to longstop dates of 18 July 2021 (premises in England) and 7 August 2021 (premises in Wales).
Protected rent debts include service charge and other sums payable by the tenant to the landlord “for possession and use of the premises”.
On what basis will the arbitrator decide whether to grant relief or not?
Any award made by the arbitrator should be aimed at restoring/preserving “the viability of the business of the tenant, so far as that is consistent with preserving the landlord’s solvency”.
In considering the above, “the arbitrator must disregard anything done by the tenant or the landlord with a view to manipulating their financial affairs so as to improve their position in relation to [the arbitration]”.
There are various other matters that the arbitrator must have regard to, including:
- The assets and the liabilities of the landlord and the tenant, including any other tenancies to which they are a party;
- Any previous rental payments made by the tenant to the landlord in question;
- The impact of coronavirus on the business of the tenant; and
- Any other information in relation to the financial position of the landlord or the tenant that the arbitrator considers appropriate.
The arbitrator must disregard, however, the possibility of the landlord or the tenant:
- Borrowing money; or
- Restructuring its business.
What kind of relief can the arbitrator grant?
Firstly, the arbitrator can be asked to decide whether or not there is a protected rent debt.
If there is a protected rent debt, the arbitrator can do one or more of the following:
- Write off the whole, or part, of any debt;
- Give the tenant time to pay the whole, or part, of any debt;
- Require payment of debt by instalments; and
- Reduce (including to zero) any interest that would otherwise be payable on the debt.
When can arbitration be initiated?
Either the landlord or tenant can initiate arbitration at any point in a period of 6 months beginning on the day on which the Bill becomes law.
At the moment, the Government plans to bring the legislation into force on 25 March 2021, so it is likely that 6 month period for initiating arbitrations will commence on this date.
How does a party initiate arbitration?
The initiating party much notify the other party (“the respondent”) of their intention to refer a debt to arbitration.
The respondent then has 14 days in which to submit “a response”.
Upon receipt of a response, or at the end of 28 days after notifying the respondent, whichever comes sooner, the initiating party may refer the matter to an “approved arbitration body”. (As yet, we have not been told who the approved arbitrating bodies will be.)
A reference to arbitration must include a formal proposal for resolving the debt. The respondent will also have an opportunity to put forward a counter-proposal (if they want to).
The initiating party must also pay the arbitrator’s fee at the point that the referral is made. However, the arbitrator gets to decide who must ultimately bear the fee at the end of the arbitration.
How will the arbitration be conducted?
The default position is that the arbitrator will decide whether to grant relief on the basis of written submissions and evidence provided by each party.
However, either party can request an oral hearing. If an oral hearing is requested, it will take place in public, unless both parties agree that it should be held in private.
The arbitrator must give his/her decision “as soon as reasonably practicable” and, in cases where there has been an oral hearing, within 14 days beginning with the day on which the hearing concludes.
The arbitrator must publish his/her award, together with the reasons for making it. However, any confidential information must be excluded from the published award.
Significantly, the Bill expressly states that both parties must bear their own legal costs in relation to the arbitration.
Extension of existing moratoriums
The existing moratoriums that are currently in place in relation to CRAR, forfeiture and the presentation of winding-up petitions (pursuant to commercial rent debts), will remain in place until the Bill has been passed (expected to be 25 March 2022).
Once the Bill has been passed - during the 6 month window in which parties may initiate arbitration - there will be a moratorium on the exercise of CRAR, forfeiture and he presentation of winding-up petitions, in respect of protected rent debts, i.e. debts which fall within the scope of the arbitration scheme.
From 10 November 2021 onwards, the Courts can stay any new debt claims (i.e. court proceedings), in relation to protected rent debts.
Once the Bill has been passed, there will be an absolute prohibition on the issue of new debt claims (in relation to protected rent debts), for the 6 month period during which such debts may be referred to arbitration.
During the 6 month period during which protected rent debts may be referred to arbitration, landlords may not recover the debt from any rent deposits that they are holding.
If a landlord lawfully recovers a protected rent debt from a rent deposit, before the beginning of the 6 month period, the tenant is not required to make good any shortfall in the rent deposit and such rent can still be considered for relief in the context of an arbitration.
Where a matter has been referred to arbitration, CVAs in relation to any of the protected rent debts are prohibited, from the date of referral until the arbitration has been disposed of.
In cases, where an arbitrator has granted relief, no proposal for a CVA can be brought forward for a period of 12 months after the date on which relief has been granted.
The above is a summary of what we consider to be the key provisions contained within the Bill. However, as you might expect, the exact wording of the Bill is nuanced and open to a range of interpretation in certain places.
If you have any specific queries in relation to any of the points highlighted above, or any of the other provisions in the Bill, we would be delighted to discuss these with you.