Rachel McCahill considers the new Commercial Rent (Coronavirus) Bill enabling relief from payment of certain rent debts under business tenancies adversely affected by the Covid-19 pandemic.
The Covid-19 pandemic resulted in many tenants being unable to fulfil their obligations under their respective leases that was neither the fault of the tenant or of the landlord. Whilst the simple legal position was that tenants remained liable for covenants and payment obligations contracted under the lease, it’s accepted that some tenants were unable to comply through no fault of their own. In these scenarios, there are key steps you can take to avoid arbitration or improve its outcome.
The existing law and the new Bill
The government is attempting to address the issues by introducing the Commercial Rent (Coronavirus) Bill (‘the Bill’) and the Commercial Rents Code of Practice (the last version being published on 9 November 2021) (‘the Code’). The intention is for the Bill to be passed by 25 March 2022 (subject to parliamentary approval). Until then, the existing measures that restrict landlords’ enforcement options will apply.
The Bill applies to all commercial leases held by businesses which have built up rent arrears stemming from the pandemic, irrespective of the sector they operate in, and relates to commercial rent debts, service charges and insurance accrued since March 2020 within England, Wales, Northern Ireland and Scotland. The principle behind the Bill is that the preservation of the tenant business’ viability should not impact on the landlord’s solvency, but equally that tenants should never have to take on more debt or have to restructure their business merely to continue paying the rent. It is also hoped that this approach will help to save the jobs of employees of those protected businesses as Britain emerges from the pandemic.
The Bill encourages landlords and tenants to negotiate with each other in relation to rental arrears, even where the accrued debts fall outside of the scope of the Bill. It also creates a new arbitration process to achieve this where the parties are unable to reach agreement between themselves. The relevant ringfenced period for rental arrears runs from 21 March 2020 (when the first requirements on businesses to close their premises or cease trading) to the date when specific restrictions were last removed for the relevant sector. For example, 13 May 2020 for garden centres, 12 April 2021 for non-essential retail and 18 July 2021 for hospitality and nightclubs. Helpfully, Annex A to the Code contains all the relevant dates for businesses in different sectors, and advisors should consider this carefully on a case-by-case basis.
As currently drafted, where the parties have not reached agreement in relation to a protected rent debt, they will have a six-month window from the date upon which the Bill is passed in which to refer the matter to the new arbitration scheme, but this will not affect court claims and other proceedings commenced before 10 November 2021. However, Schedule 2 to the Bill currently contains retrospective provisions applicable to certain claims started on or after 10 November 2021 but before the Bill is passed. In short, in such circumstances, either party may apply to the court for proceedings involving a protected rent debt to be stayed to enable the matter to be resolved and the court must grant the application. If judgement has already been given in respect of a claim, but any part of it is unpaid, the matter can still be referred to the arbitration scheme. Interestingly, though it appears that guarantors who are parties to the tenancy will also be able to seek a stay in proceedings concerning protected rent debts that started on or after 10 November 2021, it does not seem that they would be able to refer a matter to arbitration themselves. Therefore, any advice given to guarantors needs to bear this in mind.
The government considers it in the interests of both the landlord and tenant to do everything that they reasonably can to enable businesses that are otherwise viable to continue operating through this period of recovery. As tenants are still liable under the lease, the expectation of the government is that tenants who can pay their rental arrears should do so. Unfortunately for some landlords, there are some businesses who are utilising the protection afforded to tenants inappropriately even where they should be, and could be, paying rent.
In the first instance, tenants unable to pay their rental debts in full should negotiate with their landlords, and the clear expectation is that the landlord should share the burden with the tenant where possible. In theory, this will allow landlords to support tenants in need and whom might otherwise need to cease trading.
Where the parties are unable to reach agreement, the new binding arbitration process is the next step. The process will be as follows:
1. The landlord or tenant must notify the other of their intention to pursue binding arbitration. At this point, the party will be expected to submit its proposal for the payment of the rent arrears, supported by appropriate evidence of ability to meet the proposal. For a better outcome I would recommend that clear and comprehensive evidence is obtained from a suitable person/body (for example, the accountants of the tenants or an insolvency practitioner) and put forward to support claims on inability to pay. With regard to tenant viability and affordability the Code also sets out criteria to consider such as the balance between the parties, business performance since March 2020, the assets of the tenants, government assistance, payments made to directors and shareholders, and the tax position.
2. The other party can respond and can either accept the proposals or submit a counter-proposal. If the proposals would put financial strain on the landlord, then this should be set out in detail in the response/counter-proposal, as some landlords will be better able to absorb any shortfall in comparison to others.
3. Consider a counter-proposal.
4. Make an application with fee and the notification sent pre-application, proposal for resolution and relevant supporting evidence.
5. The other party then has 14 days to submit its proposal with supporting evidence.
6. Both parties can then submit revised proposals and the arbitrator has the power to request further evidence.
7. Hearing within 14 days from receipt of a hearing request. Hearing should last no longer than six hours.
8. The arbitrator’s decision will be given within 14 days of a hearing or, where there is no hearing, as soon as reasonably practicable after final proposals provided or the time limit for doing so has expired. The award will be legally binding.
9. The arbitrator will consider the proposals put forward by both parties against the principles, and the award will adopt whichever proposal is most consistent with the principles. If neither proposal is consistent then the arbitrator will make its own award. Having a clear fact-based picture about the ability to pay will make a strong impact here.
The Bill also deals with situations involving several separate dates due from a tenant to the landlord. Where the tenant has adopted the law of appropriation (such as specifying that money be put towards a particular instalment), the landlord must apply it in that manner. However, Schedule 2, para 7 to the Bill provides that where a tenant makes a payment during the period for referring a matter to statutory arbitration but does not appropriate the payment, the landlord must apply the payment to meet the unprotected rent debt before the protected rent debt. Schedule 2, para 8 goes even further, stating that where a landlord received a payment in the period after the protected period ended but before the moratorium period under the Bill starts, and has allocated that payment to unprotected rent debt, that allocation will be ineffective.
Therefore, landlords and tenants should try to resolve the position between themselves to start with. Once in arbitration, the risk arises that a party to the lease ends up in a worse position than previously was offered (which is beneficial for the other party).
To mitigate the impact of debts for property practitioners from an insolvency perspective you should:
- negotiate with tenants unable to pay their rental debts in full to agree a new debt repayment arrangement and avoid the need for arbitration, and
- if an application for arbitration is necessary, ensure that you have evidence ready to support it.
These actions should not only save you money by minimising time and expense in arbitrating, and therefore getting rental payments paid faster but it will also reduce the stress of the situation. Remember too to keep an eye out for any changes to the Bill and Code and if your client has cross-border assets covering other jurisdictions you should consider consulting an insolvency expert.