A new Bill has been introduced with a Code of Practice and mandatory arbitration procedure designed to help tackle coronavirus commercial rent arrears disputes. However, there will still be issues for both landlords and tenants.
The Commercial Rent (Coronavirus) Bill
On the 9 November 2021 the Government, namely the Department for Business, Energy & Industrial Strategy and the Department for Levelling up, Housing and Communities, introduced the Commercial Rent (Coronavirus) Bill (the Bill).
The Bill looks to introduce a mandatory arbitration system, where agreement between Landlords and Tenants on the payment of arrears accumulated during the pandemic cannot be reached, and a new Code of Practice.
The Government has deemed new legislation necessary as the estimated rent arrears across the real estate sector has risen to £7.5bn as a direct result of mandated business closures during the pandemic.
The intention is for the arbitration process to come into force from 25 March 2022 and will apply to England and Wales.
Mandatory Arbitration System
The Bill applies to “Protected Rent Debt” where:
- The tenant was mandated to close their premises or cease trading;
- The lease is a business tenancy, as defined by Part II of the Landlord and Tenant Act 1954; and
- The rent accrued during the “ring fenced period”.
“Protected Rent Debt” under the Bill includes:
- Service Charges
- Insurance debt
The ring fenced period commences on 21 March 2020 but will then vary according to when the restrictions imposed on a particular class of business were lifted. For example restrictions were lifted for nightclubs on the 18 July 2021 in England;
Arrears which fall outside the definition of Protected Rent Debt or the ring fenced period remain payable in full.
It must be noted that the Bill only captures those businesses that were forced to close by government mandate. Businesses that chose to close or were otherwise effected are not covered by the Bill and thus many businesses will not benefit from the arbitration system.
Ring-fencing of Rent Debt Claims
Many landlords and tenants have cooperated to reach agreements in respect of arrears resulting from the pandemic; however, some landlords have pursued remedies such as County Court or High Court Judgments, as was their legal right. The Bill essentially introduces a mechanism by which either party can apply to stay rent debt claims issued from the 10 November 2021, putting new claims on ice until the Arbitration procedures are enacted.
Of no less significance is the bar on Landlords drawing down on tenancy Protected Rent Debts.
For parties that have failed to reach agreement, and who fall within the scope of the Bill, either party can apply for arbitration unilaterally as a backstop after negotiations have failed. It should be noted that parties are free to continue to negotiate outside of the legal arbitration process once it comes into force.
- The window to apply for arbitration will be 6 months from when the Bill is enacted;
- The maximum time frame to repay arrears will be 24 months.
The arbitrator can either:
- a) Write off the whole or any part of the Protected Rent Debt;
- b) Give time to pay the whole or any part of the Protected Rent Debt, including by allowing payment in instalments; and/or
- c) Reducing (including to zero) any interest due.
The legal arbitration process will be delivered by approved private arbitrators who will be announced in due course.
New Code of Practice
The new code will replace the existing ‘Code of Practice for commercial property relationships’ which was originally introduced on 19 June 2020 and updated further in April 2021.
This Code of Practice is relevant to commercial rent debts (including service charges and insurance) accrued since March 2020. The code can be used by any business to help them negotiate and resolve rent disputes even if they fall outside of scope for arbitration, further details of this scope can be found within the code. Crucially the Code of Practice itself is not binding.
The moratorium on forfeiture and restrictions on the use of Commercial Rent Arrears Recovery (known as CRAR) regime remains in place until 25 March 2022 in England, Wales and Northern Ireland. In addition the restrictions on the presenting of winding-up petitions until 31 March 2022 also remain.
Blake Morgan commentary
The Bill may bring relief to some commercial tenants who were under increasing pressure from landlords in relation to ongoing or threatened commercial debt claims. However many tenants will find themselves either outside the terms of the Bill altogether or facing the consequences of claims commenced before 10 November 2021. Tenants will need to consider their position carefully in light of these proposals. We can assist clients with their strategies in this regard.
For landlords, they are once again asked to bear the arrears burden, this time until the arbitration system comes into force. More than a few landlords who have forborne from pursuing claims may now be under threat as they face further delays and uncertainty.
In the interim, landlords are likely to renew their focus on negotiations with their tenants for the settlement of arrears. The question is whether tenants will have any interest in such discussions or will they want to wait for the Arbitration process to become available. In any event many tenants have been gifted more time to enable them to trade out of the Pandemic related disruptions.
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