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The Commercial Rent (Coronavirus) Bill – unwinding commercial rent arrears

15 November 2021

At the height of the Covid crisis in 2020 the government passed a raft of legislation containing wide reaching provisions protecting commercial tenants from eviction for non-payment of rent and preventing landlords from exercising other remedies against defaulting tenants. These protections have been extended throughout the crisis and will finally come to an end on 22 March 2022.

Since then the government has been wrestling with the problem of how to unwind the question of Covid arrears and balance the needs of both occupiers and their landlords.

The government has now published documents seeking to resolve this issue:

The basic principle is that Covid lockdown arrears for business premises are to be 'ring-fenced' so landlord remedies continue to be suspended in respect of such debts. Landowners and occupiers are encouraged first to negotiate through the Code, and if unable to reach agreement refer the matter to binding arbitration in accordance with the Bill.

Code of Practice

The new Code aims to provide a process for parties to negotiate towards settling Covid arrears before the new arbitration process comes into force.

The Code replaces the existing Code of Practice for commercial property relationships published in June 2020 (updated in spring this year) and covers some 75 points.

Key items in the Code include:

  • a statement that pre-existing arrangements as to arrears still should be honoured – so the new code should not be taken as an opportunity to renegotiate existing arrangements;
  • a statement that payments for rents outside the ring-fenced period are to be treated as to cover such period as the tenant has specified (or in the absence of this it will be treated as being payment for rent outside the period within scope of arbitration);
  • a useful overview of the Bill and the binding arbitration process;
  • provisions highlighting encouraging negotiation between the parties and an outline of the key behaviours comprising transparency, collaboration, a unified approach and reasonableness;
  • a discussion of the key principles of 'viability' and 'affordability', in particular those set out at paragraph 50, as well as underpinning the Code these will be taken into account in the arbitration process:

'a. the aim is to preserve viable businesses

b. the preservation of the viability of the business of the tenant should not be at the expense of the solvency of the landlord

c. where it is affordable for a tenant to meet their obligations under the lease in full, they should do so without delay; any relief should be no greater than necessary for the tenant business to afford the payment.'

Ring-fenced Debt

The Bill will constrain certain landlord remedies in respect of 'ring-fenced' debt until the parties have reached a settlement, or the timeframe for binding arbitration is over. 

The ring fenced period is from 21 March 2020 until the last date operating restrictions were removed from the relevant sector – it is important to remember that establishing this date is not straightforward, the Code contains useful Annexe A with timelines showing the differing periods.

There will be a six month window from 25 March 2022 for parties to apply for arbitration, with a maximum time frame for repayment of 24 months.

The Bill provides that the various Covid tenant protections will continue during the ring fenced period – the moratorium on forfeiture in the Coronavirus Act 2020, the prohibition on winding up petitions in Schedule 10 to the Corporate Governance and Insolvency Act 2020 and the constraints on commercial rent arrears recovery in the Taking Control of Goods (Amendment) (Coronavirus) Regulations 2021.

The Bill allows debt claims from 10 November 2021 onward to be stayed on the application of one party and prevents proceedings being issued whilst arbitration is ongoing. This means that landlords seeking to take pre-emptive or additional court action will not be at an advantage. There are also similar constraints on presenting bankruptcy petitions.

Additionally, landlords will be prevented from using rent deposits to cover Covid era arrears, and where that has already happened then the obligation on the tenant to 'top up' a rent deposit is suspended.

Where a tenant has entered the binding arbitration system then it may not include ring-fenced debts in a CVA or other restructuring plan after the arbitrator is appointed and for a period of 12 months from the award.

Binding Arbitration

From 25 March 2022 the Bill will introduce a legally binding arbitration process for outstanding lockdown arrears in England & Wales.

The arbitration process will deal with premises which were required to close from March 2020 until the end of the restrictions relevant to their sector and will apply to commercial rent arrears for businesses required to close during the Covid crisis, but not to other arrears.

The Code contains Annexe A with timelines showing the differing periods, this provides a useful guide to complex web of secondary legislation creating the various different business closure regimes.

It should be noted that the process is intended a last resort which either party can seek unilaterally, negotiation outside the arbitration is permitted and indeed is encouraged in the Code. 

The arbitration comprises six stages involving notification of intention to pursue arbitration, with proposals and counterproposals from both sides and then an application for arbitration including evidence as to viability and affordability in the case of a tenant.

It will result in a legally binding agreement determined by an approved private arbitrator.

Annex C of the Code contains a useful flow chart illustrating the arbitration process in depth.

Applicability across the UK

The Code applies across the whole of the UK, including Scotland.

The Bill applies to England & Wales, but does not apply in Scotland.  

The Bill contains provisions which give Northern Ireland a power to make similar legislation.  

Comment

From the announcements, it is to be noted that the government has stressed that the arbitration scheme is intended as a last resort and that landlords and tenants should negotiate their own agreements where possible.  Whilst unclear at this stage, it is expected that the approved list of arbitrators will be financial (as opposed to property) experts.  The arbitrators, on the current proposals, are allowed a relatively wide degree of discretion in determining the outcome of relief (if any) to be awarded to a tenant and who should bear the costs of the arbitration itself.

Furthermore, any awards granted by the arbitrator must be published alongside the reasons for making such an award.  Despite the publication of the awards and reasons, these will not create a precedent that will bind other arbitrators when considering separate references.  It is therefore likely, due to the wide discretion afforded to the arbitrators, that we could see varied decisions on similar facts.

Whilst there are still a number of questions to answer, the recent announcements will provide a little more clarity to both tenants and landlords.  On the one hand, tenants will be able to take comfort that the ring-fenced arrears remain out of reach of landlords for the time being, ensuring business viability, whilst landlords will feel some relief that rents falling due beyond the protected period will be payable in full.

We have acted for both tenants and landlords throughout the pandemic.  If these developments have or will have an impact upon you and/or your business, please do not hesitate to get in touch with us.

Further Reading