Arbitration scheme ends – Landlords and tenants prepare

The binding arbitration scheme that was introduced by the government in response to commercial rent arrears accumulated during periods of forced closure due to COVID 19 has now come to an end.

What does this mean for commercial tenants?

Any rent still owed by a tenant from the COVID era which has not already been the subject of a compromise agreement with their landlord, or which is not already the subject of an arbitration is now able to be enforced the their landlord by the usual recovery action.

The Arbitration Scheme

The scheme which was first introduced in May 2022, was designed to ring fence COVID rent arrears which had been built up when commercial tenants were forced into a temporary closure due to successive COVID 19 related lockdowns. It was hoped that landlords and commercial tenants would be able to negotiate their own compromise agreements in relation to those arrears but if not then the e arbitration scheme could take over providing a pathway designed for those parties that were still in dispute. The scheme effectively protected the rights of tenants forcing COVID rent disputes into arbitration using Government approved arbitrators, by-passing the Courts. But the scheme closed to new entrants on 23 September 2022 and has not been extended.

What does this mean for landlords?

Following the expiry of the scheme, landlords of commercial property are now able to resume full debt recovery action for any tenant rent arrears which accrued during the COVID pandemic and which have not already been compromised or are still running through the arbitration process.

What are the remedy options now for non-payment of rent

Any commercial landlords facing the challenge of recovering rent arrears accrued during the COVID era now have a number of options to consider. This includes starting Court proceedings to recover these rent arrears debts. Nevertheless, despite the ending of the arbitration scheme it is always better to first explore with your tenant whether both parties can find a solution which they can both agree to commit to.

Problems can occur when tenants assume/expect their landlords will automatically offer to write off these arrears altogether (under false assumptions that their landlord can afford to suffer that loss). This risks placing some landlords into a negative cash position with their tenants and may adversely affect the landlord’s debt ratio. These are the sorts of issues that can cause disagreements between both parties, which could put successful negotiations at risk.

Risk of insolvency

Many landlords will accept that reaching a negotiated settlement with their tenant in respect of these arrears is a better outcome and where current rent continues to be paid. They will be reluctant to threaten action which risks long-term financial stability of their tenant except in relation to those businesses which show no sign of improvement.

If landlords were to lose tenants to insolvency in this current climate the costs of going through the insolvency process are high, and they would potentially need to survive with empty premises and picking up rates and other liabilities. .

From the tenant’s point of view of course securing a mutually acceptable agreement in relation to paying down COVID arrears should provide them with some certainty for future trading in what remains a very challenging economic environment.

Debt recovery

Some landlords may nevertheless now choose to adopt a debt recovery strategy. It’s widely known that many commercial landlords or tenants do not look upon debt proceedings favourably for recovery of COVID arrears, as reputational damage can be a factor. But there is now no bar on landlords starting debt proceedings in the Court.

We have a team of specialists who can help whether you are a landlord or a tenant involved in COVID rent recovery action. It may be you are a landlord wanting to start Court proceedings or a tenant seeking to resist a claim.