Legal briefing | |

The last resort for COVID-19 rent arrears?

Arbitration under The Commercial Rent (Coronavirus) Bill

Overview

The legislative protection for debtors against landlord action introduced during the COVID-19 pandemic is being unwound. As outlined in our previous briefing note on 20 September 2021, unlike other creditors, landlords currently remain restricted from presenting winding-up petitions in relation to amounts due under commercial leases or from exercising their forfeiture rights. The Government has now published draft legislation to implement a new binding arbitration process intended to deal with rent arrears incurred during previous lockdown-imposed closure periods.

The Bill

The Commercial Rent (Coronavirus) Bill (the "Bill") was introduced in Parliament on 9 November 2021, along with a new Code of practice for commercial property relationships following the COVID-19 pandemic (the "Code of Practice"). The government aims to pass the Bill by 25 March 2022, subject to parliamentary approval.

These measures are intended to facilitate the resolution of disputes over rent arears incurred during periods of forced closures during the pandemic.  The Code of Practice sets out how landlords and tenants should negotiate in relation to outstanding rent arrears, with the Bill (when implemented) creating a binding arbitration process where the landlord and tenant are unable to reach an agreement on rent within the scope of the process (see further below). 

If referred to the arbitrator, the proposed legislation implements a process whereby each party can make representations and offers in relation to the rent arrears.  If no agreement is reached, the arbitrator can make a binding decision on how the rent arrears should be addressed, taking into account various factors.

The Government has stressed that the arbitration process is intended to be a last resort.  Whilst the Bill is in draft form and certain elements may be amended or clarified as it passes through Parliament, it would seem that (at least as currently drafted) there are a number of limitations to the process which may restrict its usefulness in practice.  In particular:

  • Financial condition – To obtain relief under the arbitration process, the tenant will need to demonstrate that the rent arears are unaffordable. However, the process can only be used where the tenant would otherwise be viable if it were given full relief from the relevant rent arrears.  COVID-19 has typically had a broader impact on companies, such that they may have financial difficulties that cannot be rectified simply by writing off rent arrears incurred during closure periods.  This provision would seem to exclude tenants who have wider and deeper financial issues.  Furthermore, a tenant may let properties  from multiple landlords, each with rent arrears and, therefore, potentially a number of arbitration processes could be ongoing at the same time. Not only would this be cumbersome and time-consuming for the tenant, it is also not clear how each arbitrator could reach a holistic conclusion of the tenant's viability.

  • Scope of the rent covered – Rent arrears can only be referred to arbitration if they relate to the period during which the tenant was required to close the whole or part of its business or premises, or to restrict trading, from 21 March 2020 until the last date when such closure requirements applied (i.e. periods between mandated "lockdowns" are covered). This means that rent arrears for periods where the business chose to remain closed after the last required closure period (as opposed to being mandated to do so) are not covered. Many businesses may not have opened their premises as soon as they were able to do so, due to the economic uncertainty (or impossibility) of operating when footfall might not have been at the levels required to make the operational costs viable.  In addition, even where premises were able to reopen, some businesses will have found that revenue did not immediately return to pre-pandemic levels to sustain the previous levels of rent.  The arbitration process therefore might not go far enough to address other elements of rent which may be unaffordable to the business. 

  • More effective options available – Given the limitations around the arbitration process, and the uncertainty as to what award the arbitrator might make (if it is satisfied that the tenant is eligible), a tenant company might consider other restructuring options to be preferable to the arbitration process. A company voluntary arrangement, for instance, could allow a company to undertake a comprehensive restructuring, which could include all rent arrears and rebasing its future rent to ensure that rents are set at sustainable levels in the post-COVID-19 world.  A restructuring plan might also be an option where it might be necessary to cram-down dissenting creditors (see more in our briefing note on our client, Virgin Active's, restructuring plan).


What does this mean for landlord enforcement action?

The existing protections for tenants preventing landlords from forfeiting commercial leases or exercising Commercial Rent Arrears Recovery are due to end on 25 March 2022, with the restrictions on commercial landlords petitioning for a company to be wound up on the basis of unpaid rent due to end by 31 March 2022. 

When the Bill comes into force, new measures will be introduced protecting tenants from landlord enforcement action in relation to the rent arrears which fall within the scope of the process.  This will apply until the rent arrears have been settled through the arbitration process, or until the date falling 6 months after the passing of the Bill into legislation if no application for arbitration is made within that window.

However, this will likely leave companies exposed to landlord enforcement action where that company has either not paid rent for a period falling outside of the arbitration process or where that company is ineligible for the arbitration process (e.g. where it does not fall within the financial condition requirements due to having broader financial difficulties). 

Key takeaways

Whilst it is encouraging that the Government is seeking to encourage landlords and tenants to reach an amicable solution to rent arrears incurred during the pandemic, tenants and landlords should carefully consider their options with the benefit of advice.  The arbitration process may assist in encouraging dialogue between the parties, but the use of the process may not be the best, or most complete, option available to deal with a company's financial difficulties. 

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