What parties can expect from the new laws and code to resolve remaining COVID-19 commercial rent debts

The Department for Business, Energy & Industrial Strategy Government has published a long awaited press release confirming that new laws, together with an updated code of practice, to resolve remaining COVID-19 commercial rent debts are to be introduced.

Summary

• A new binding arbitration process to deal with pandemic rent arrears will commence in March 2022
• This will cover arrears of rent, service charges and insurance that have accrued during periods of legally forced closure
• The new code of practice encourages tenants to pay rent where it is affordable to do so, but landlords should agree concessions to help their tenants where appropriate
• The ban on forfeiting commercial leases for non-payment of pandemic rent arrears will remain in place until March 2022
• Debt claims for pandemic rent arrears will be restricted from November 2021

This article will focus on what parties can expect from the proposed arbitration process.

For an overview of the government’s recent announcements and what they will mean for commercial landlords and tenants please see my colleague Marianne John’s article here.

Binding Arbitration

The Commercial Rent (Coronavirus) Bill, which is expected to be approved in March 2022, introduces the government’s binding arbitration process which is to apply where agreement has not been reached between commercial landlords and tenants regarding the payment of arrears that accrued during the “protected period”.

The “protected period” runs from 21 March 2020 until the last day on which the business carried on from the premises was subject to forced closure. The protected period relevant to each business sector can be found in an Annex to the new code of practice here.

For example, for the purposes of the scheme the protected period for non-essential retail will run from 21 March 2020 to 12 April 2021 (when non-essential retail was allowed to re-open).

In addition to rent the scheme will also apply to service charges and insurance that have accrued during the protected period.

Where landlords and tenant have failed to reach agreement on the amount that is to be paid in relation to these sums they can apply for the matter to be determined by arbitration.

Arbitration bodies will have to demonstrate that they are competent to supply arbitration dispute resolution services and will publish a list of arbitrators that are approved according to BEIS standards.

It is to these bodies that a landlord or tenant will need to apply.

Pre-Arbitration Requirements

Prior to applying to an arbitration body the parties are required to go through a pre-arbitration notification process.

This requires one party to serve notice on the other notifying them of their intention to apply for arbitration. This should include a proposal to settle the unpaid protected debt.

The respondent has 14 days to respond to the letter, which can include a counteroffer.

The initiating party then has 14 days to consider any response and reply to it. After expiry of those 14 days, or 28 days if no response is received, either party can proceed to apply for arbitration.

The Arbitration Scheme

The parties will have six months from the date that the legislation comes into force in March 2022 to make an application to the scheme.

The application must include a formal proposal to resolve the unpaid protected debt.

After receiving an application an arbitrator will check that the case is eligible for the scheme before accepting it.

The responding party will have 14 days from receipt of the applicant’s proposal to submit their own proposal.

Each party will have the opportunity to submit final proposals after seeing the initial proposals.

The parties can agree for the matter to be determined via a hearing, or for the arbitrator to reach a decision on paper based upon the information provided.

The arbitrator will have up to 14 days from a hearing, or as soon as reasonably practicable if there is no hearing, to consider the evidence and come to a decision.

The arbitrator’s decision be legally binding and tenants will have up to 24 months to make payment of the sum awarded.

The new code of practice sets out a list of three principles that should be considered by landlords and tenant when considering these pandemic arrears.  They are:

1. To preserve viable businesses
2. The preservation of the viability of the business of the tenant should not be at the expense of the solvency of the landlord
3. Where it is affordable for a tenant to meet their obligations under the lease in full, they should do so without delay; any relief should be no greater than necessary for the tenant business to afford the payment

The code goes on to state that the arbitrator will also adhere to these principles should binding arbitration be undertaken.  Finally, it confirms that:

“When deciding what award to make, the arbitrator will assess the proposals submitted by the parties for resolution of the protected rent debt against the principles. The award will adopt whichever proposal is consistent with the principles, or if both are consistent the proposal which is most consistent. Otherwise, the arbitrator will make the award they consider is appropriate.”

Conclusion

We will follow up with further commentary on the new code of practice in due course.  What is clear is that the parties are still being encouraged to try to reach agreement between themselves, both now and once the arbitration application window has opened, and that the preservation of viable business is at the heart of the government’s proposals.  Although the proposed arbitration process seems relatively straightforward, the likely outcome to the parties will rest, it seems, on whose proposals are most consistent with the principles set out in the code.