The Commercial Rent (Coronavirus) Bill finally received Royal Assent on 24 March 2022 and has established a legally-binding arbitration process for landlords and tenants to settle certain outstanding debts arising from the national lockdown period between 21 March 2020 and 18 July 2021.
Landlords and tenants are encouraged to use this new law to try to reach an agreement; if not, the matter can be referred to arbitration.
With the six month deadline to refer these matters to arbitration coming to an end on 24 September 2022 (with a pre-arbitration process deadline 28 days before then), we outline the steps involved and why tenants need to act now. If tenants do not respond effectively in time, protections gained shall be lost.
What is the Commercial Rent (Coronavirus) Act 2022?
The Act has been introduced to coincide with the end of multiple restrictions that were placed on landlords since late March 2020 – preventing them from recovering pandemic-induced rent arrears from their tenants.
It aims to encourage collaboration, keep disputes out of court, and avoid the time and costs of litigation.
For rent debts to be considered for the arbitration process:
- The rent must be attributable to 21 March 2020 and 18 July 2021; and
- The tenant must have been mandated to close by reason of coronavirus during that period.
Any rent debts outside of these dates won’t be subject to such restrictions which means landlords can sue and forfeit leases for rent arrears incurred by tenants who weren’t forced to close during Covid – such as essential retail and pharmacies.
Some sectors – such as non-essential retail and hospitality – were able to reopen before the above stated period due to restrictions being lifted. It is important to bear in mind that rent debts will not apply to those certain time periods for these industries.
Evidence that the business was otherwise “viable” during the time frame referred for arbitration will be needed as businesses which were effectively already insolvent are not covered by this arbitration scheme.
What is not covered under the scheme?
Tenants are not eligible to apply for arbitration under the scheme if:
- The landlord has already started formal recovery action against the tenant prior to 25 March 2022.
- An agreement has already been reached with the landlord as to how to treat any rent debt accrued during the relevant period.
The arbitration process
Either landlords or tenants can start the arbitration process. There is a deadline of 24 September to refer these protected debts to arbitration.
It’s important to note that starting the arbitration process does not necessarily mean you are bound to end up in front of an arbitrator – most disputes referred are expected to be settled, outside of arbitration, on terms agreed between the parties themselves.
For those that do reach an arbitrator, there are three stages of the process:
- Pre-arbitration, which must be commenced within six months of 25 March – so by 24 September 2022.)Prior to a referral, either the landlord or tenant needs to notify the other party of their intention of doing so.
Within 14 days of receiving this notification, the other party can respond, which will then allow for another 14 days before the formal referral can be made. As the process deadline is 24 September 2022(which is a Saturday), the pre-notification period should be started no later than Friday 26 August 2022 to allow for this period.
- After this, the arbitrator must determine whether the criteria for the process has been met. This includes checking whether the tenant was adversely affected by COVID, if the tenant’s business is viable or would be viable if given relief, and whether the debt relates to the protected period.
- The arbitrator will then consider what relief should be granted in relation to the owed debts. They will determine how much the tenant can afford to pay and how quickly, as well as take the landlord’s position into consideration and whether any relief will jeopardise their solvency.
Any award the arbitrator makes has a payment deadline of 24 months from the day the decision is handed down.
How does this affect landlord and tenants?
The criteria for arbitrators to consider when making their decisions seems, for tenants, to be quite flexible in terms of assessment of their viability, whereas for landlords, these are pretty limited. The act says in assessing the solvency of landlords, the arbitrator must have regard to their assets and liabilities, including any other tenancies to which they are party, and any other information relating to the financial position of the landlord the arbitrator considers appropriate.
While the analysis of assets and liabilities might be familiar territory for landlords and their advisers, the reality is that the bill offers limited protections for landlords in this regard. The bill would appear to simply wish to avoid tipping landlords into insolvency by granting concessions to tenants, rather than positively seeking to improve the position of landlords.
However, it is important to remember that some landlords may be suffering considerably as a result of Covid and unpaid rent, leaving them unable to meet their loan repayments or pay their staff for example.
Within the jurisdiction granted, we would expect arbitrators to not only look at tenants’ viability in isolation and make sure they are seriously considering landlords’ positions during the process to ensure they are not being adversely affected.
Two major cases – brought by BNY Mellon and the London Trocadero – in relation to pandemic-induced rental arrears are currently making their way through the courts, with a decision in the Court of Appeal expected shortly
Should these cases succeed, there is the potential for relevant rent arrears not to qualify as protected debts. And if there is no protected rent debt, arbitrators must dismiss any such referrals. However, time is now running out for tenants to make a referral and it is becoming increasingly risky to delay.
Although many landlords are not choosing to use the Act (they are likely waiting until 24 September when they will get their full enforcement rights back), tenants have the right to rely on these new provisions. However, they need to act now as pre-arbitration steps need to be taken by 26 August 2022.
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