The Commercial Rent (Coronavirus) Bill is currently being reviewed by parliament. Its aim Bill is to deal with accrued rent arrears for businesses forced to close during the Covid-19 pandemic. It essentially provides for the ringfencing of this rent debt and establishes a binding arbitration process which can determine what happens to that debt.
The Bill is draft legislation, so what it provides, and its details, may be subject to alteration or change as it passes through the parliamentary process. The government’s current aim is to have the Bill passed by 25 March 2022.
We await the final version of this draft legislation, but have collated frequently asked questions covering how the Bill’s provisions would affect you, as either a tenant or landlord
Q: Can either landlord or tenant start the process?
A: Yes, either can make the referral.
Q: How do I know if it applies to me?
A: The process would apply to you if the debt owed falls within the definition of a ‘protected rent debt’. This is a debt that accrued by a business tenant during the period when that business was required to close as mandated by the government restrictions.
It is only a ‘protected rent debt’ if the arrears accrued within that period alone. It falls outside of that definition if the business closed for any other reason (e.g. staff shortages) or at any other time that was not mandated. Debts that fall outside of these definitions are not captured by the Bill.
Tenants currently subject to debt proceedings at the county court can make an application to stay those proceedings where the debt falls within the protected rent debt definition, until the Bill coming into force.
It is possible that a tenant may have rent debts, some of which fall within the remit of the Bill and some of which fall outside it. This could mean two separate actions have to be pursued by the same landlord to capture and recover the whole sum.
Finally, if the tenant is already subject to insolvency proceedings, that falls outside the remit of the Bill.
Q: Does it only apply to rent or can service charge and insurance premiums be included?
A: The arrears covered by the Bill are widely drafted and include rent, service charges, insurance rent , interest on protected rent arrears and rent deposit top-up payments ( in respect of protected rent arrears).
Q: Can arrears outside the protected period be included in the arbitration?
A: No. The arbitration scheme proposed under the Bill will only relate to rent arrears accrued within a specific period. The Bill explains that this ring-fenced period is deemed to be from between 21 March 2020 to the date in which specific restrictions were last removed from the sector. These end dates are as follows:
- 13 May 2020 for garden centres
- 12 April 2021 for non-essential retail
- 18 July 2021 for hospitality and nightclubs.
Q: Can a landlord choose to ignore this process and just take enforcement action?
A: No, the arbitration process is mandatory, but only in respect of ‘protected rent debts’. The moratorium on enforcement action by landlords is effectively extended until pending completion of the arbitration process (where it applies). In all other cases the moratorium ends on 25 March 2022.
Q: How long does a landlord/tenant have to make a referral to arbitration?
A: The referral must be made within six months of the Act coming into force – i.e. probably no later than 25 September 2022. In the meantime, the current moratorium on enforcement effectively remains in place BUT, as the Bill is currently drafted, a referral can only be made if prior notice of the intention to refer has been given.
This effectively means that the referral cannot be made until 28 days after such notice has been given. The consequence of this is that the referral process must be started no later than 28 August 2022 or the opportunity to refer to arbitration is lost.
Q: What if my landlord/tenant doesn’t actively participate in the process after the referral?
A: Under the Bill, it is expected that both parties will put forward formal proposals to the arbitrator. If one party does not engage properly, then their proposal may be ignored and there is a risk that a less advantageous award may be made in light of the other party’s proposal. So, in most cases, it would make little commercial sense not to actively participate in the process.
Q: I have a number of properties with different landlords/tenants; can all of these be dealt with at during the same arbitration?
A: As the Bill currently stands, the answer is no; there will be a separate arbitration for each lease/property. That said, the financial position of the tenant could be affected by other (lease) liabilities and this could arguably be taken account of by the arbitrator when considering the financial viability of the tenant’s business.
Q: Does the scheme apply if an agreement has already been reached by a landlord and tenant for arrears relating to the protected period?
A: It is unclear as to whether it is mandatory to make a referral if an agreement is already reached, but this would seem illogical as the Bill provides that the arbitrator will dismiss the referral if they can determine that the parties have reached an agreement on the matter of relief from payment of a protected debt before the matter was referred to arbitration
Q: Do I need to instruct a solicitor to deal with the arbitration on my behalf? Can I represent myself (either as an individual or as a corporate) or could I use my accountant?
A: It is not a requirement, but given the complexities of the process, and the potential consequences of a failure to comply with all requirements within a relatively short time scale, it would be prudent to seek professional assistance from a solicitor or accountant, or indeed both.
Q: Do guarantors need to agree to arbitration?
A: No. The Bill does not provide for them to be involved in the process, although they will be bound by its outcome (subject to the provisions of the guarantee).
Q: How long will the arbitration process take?
A: The Bill currently requires the counterparty to file proposals with evidence within 14 days of the reference being made. After that, each party has a further 28 days to put forward further proposals and supporting evidence. The parties can agree to extend these windows by mutual consent. The arbitrator then makes a written award or schedules an oral hearing at the request of one or both of the parties.
The length of the process is likely to be heavily influenced by the need to start it within this window, as there is likely to be a shortage of arbitrators equipped to undertake this work and the procedural timetables that are set by the arbitrators may well reflect this. In contrast with a rent review arbitration which could be progressed with a short timetable, where evidence could be filed within weeks and an award a few weeks later, we anticipate these awards will take much longer.
It is also unclear how the process will address disclosure, which could be an onerous and extensive task and could have an impact upon the timetable. This is especially the case where there are landlords and tenants whose disputes and arrears relate to multiple sites.
Q: How much will it cost?
A: This is currently unclear, and legislation is expected to follow on this point. There is a real concern that the costs could be significant. The costs of an arbitrator are met by the parties themselves and are not linked to the value of the debt. Approved arbitration bodies publish their fees payable by the parties. However, it is currently unclear if arbitrations under the Bill will be subject to a fixed fee system and if those fees are low, if this will limit the number of arbitrators who agree to participate in the scheme.
The Secretary of State may make regulations specifying limits on the arbitrators’ fees and expenses (which include those of any approved arbitration body). The specified limits may differ depending on the amount of the protected rent debt in question.
Q: Who pays the cost of the arbitration?
A: When it comes to who pays the costs of the process, it varies, depending how involved the process is.
The party that refers the case to arbitration must pay the arbitration fees (other than oral hearing fees) ahead of the arbitration taking place.
Where both parties request an oral hearing, they are jointly and severally liable to pay the hearing fees in advance, but where only one of them requests an oral hearing, that party must pay the hearing fees in advance. However, when the arbitrator makes an award, it must also make an award requiring the other party to reimburse the applicant for either
- half the arbitration fees
- or such other amount as the arbitrator considers appropriate in the circumstances of the case.
Each party must meet their own legal or other costs.
Q: How long will I have to pay?
A: The Bill provides that, if an award allows the tenant time to pay, the dates for payment must be within 24 months, beginning with the day after that on which the award is made. However, the specific deadline for payments will be determined by the award granted by the arbitrator; this should be borne in mind.
Q: What is the aim of this approach?
A: The aim of the scheme is to preserve viable businesses (and the jobs associated with them) which would otherwise be unable to meet their contractual obligations to their landlords in full and face the loss of their trading premises and business.
On the other side of the coin, this does mean that landlords may not be able to recover all of the debt owed to them, through no fault of their own.