The commercial rent arrears arbitration scheme: Helping commercial landlords and tenants resolve rent debts resulting from the pandemic

During the pandemic, more than £7bn worth of rent of arrears were accrued. A new bill is soon to be introduced that will help commercial landlords and tenants resolve rent arrear disputes caused by being forced to close during the pandemic. This article explores the rent arrears arbitration scheme in more detail to helps landlords and tenants understand how this could help them.

What is the commercial rent arrears arbitration scheme?

Later this month, the Commercial Rent (Coronavirus) Bill will be introduced to allow landlords or tenants to apply for a binding arbitration process to settle disputes relating to rent arrears. It is proposed that the arbitrator will have discretion to write off arrears owed by tenants and/or to defer payment, including reducing (or removing) any interest.

The government has also reissued the ‘code of practice for commercial property relationships following the Covid-19 pandemic’ that provides guidance for both landlords and tenants on how to approach pandemic related arrears and how this arbitration scheme will function. For example, the code sets out the different stages of the arbitration process, such as the ‘compulsory pre-application stage’. All parties will be expected to follow the code’s guidance.

What does the commercial rent arrears arbitration scheme apply to?

It is limited to a “protected period” when rent arrears were accrued in whole or part during the period businesses were forced to close because of the government’s restrictions, from 21 March 2020 until the restrictions on trade were lifted for the tenant or until 18 July 2021. The rent arrears accrued during this time are referred to as the ‘ring-fenced debt’ and can include service charge, insurance costs, VAT, and interest. It only applies to “business premises” defined in the Landlord and Tenant Act 1954 and does not include licences or other lettings.

How will the arbitrator come to a decision?

The arbitrator needs to be satisfied that the tenant’s business is viable, or that it will be if they are given relief from the arrears (the viability principle), otherwise the application will be dismissed. There is no set definition of viability, but the code states that both the landlord and tenant should consider the viability of their businesses and whether any alternative resources are available to them, and that the relief should not push the landlord into insolvency.

Providing the tenant gets over this first hurdle of viability, they will then need to produce evidence as to why the ring-fenced debt is unaffordable and why its proposals are affordable. Vice-versa, the landlord will need to produce evidence as to what is affordable to them and whether any proposals would threaten its solvency (the affordability principle).

The code gives examples of what factors may be considered when considering both tenant viability and what the tenant can afford to pay. For instance, evidence of existing and anticipated credit/debit balance, business performance since March 2020, assets, government assistance received (including loans and grants), and dividend payments to shareholders.

Transparency of financial information of both landlord and tenant is key for the arbitrator to be able to fulfil the key aim of this bill i.e., to provide relief no greater than necessary to be able to preserve viable businesses, but without the expense of the landlord’s solvency. Ultimately it is a balancing act.

The effect of the bill being enacted on other methods of recovery

Once the Commercial Rent (Coronavirus) Bill is enacted, landlords will be prevented from recovering ‘ring-fenced debt’ by:

• pursuing a claim in civil proceedings (debt claims issued between 10 November 2021 and the bill coming into force will be stayed, on application of either the landlord or tenant, providing the debt relates to the debt accrued during the protected period)
• using commercial rent arrears recovery (CRAR), a statutory procedure which allows landlords of commercial premises to recover arrears by taking control of the tenant’s goods and selling them
• enforcing a right of re-entry/forfeiture
• winding up or bankruptcy petitions.

When is it likely to come into force?

This bill passed each stage in the House of Commons and is now at the report stage in the House of Lords, giving them the opportunity to further examine and make amendments to the bill. It is envisaged that landlords and tenants will be able to apply to the scheme for up to six months after the bill comes into force. The government anticipates that the scheme will commence on or around 25 March 2022, this coincides with the date section 82 of the Coronavirus Act 2020 is set to end. This currently provides protection to tenants from landlords of commercial properties wanting to enforce CRAR, by increasing the amount of rent that needs to be outstanding before CRAR can be enforced and also preventing landlords forfeiting leases.

For more information about how the commercial rent arrears arbitration scheme can help your business resolve rent debts, please contact Jonathan Foy or Simon Tucker.

This article is co-written by commercial property partner Jonathan Foy, property litigation lawyer Simon Tucker and trainee lawyer Cameron Tinkler.