At last we have some clarity on the shape of the statutory arbitration scheme, which deals with the rent arrears - including service charges and interest - built up by businesses forced to close or restrict their activities during the pandemic ("protected rents").
The UK Government published the Commercial Arrears (Coronavirus) Bill (the "Bill") on 9 November 2021, together with an updated code of practice for commercial property relationships following the COVID-19 pandemic (the "Code"). The Code emphasises the UK Government's continuing determination to protect businesses and the employment they provide. The Code also replaces the previous code of practice for the commercial property sector which has been withdrawn - see UK Government extends suspension of commercial property evictions and introduces new code of practice for June 2020. The Code is clear that statutory arbitration should be a last resort and that the landlord and tenant should attempt to sort out matters between them. It also includes a statement that where it is affordable a tenant should aim to meet their obligations under the lease in full, which is softer language than in the previous code. Failing successful negotiations, either party can make a reference to the arbitrator, with both sides required to submit their proposal for dealing with arrears of protected rents backed with relevant evidence. Proposals must not include refinancing the protected rents, or restructuring of the lease.
The arbitrator is first required to determine whether the tenant's business is a viable one, or would be viable if the tenant were to be given relief from paying the protected rents. If the business is not viable then the reference will be dismissed, and the tenant will immediately become liable for the arrears of the protected rents.
If the tenant's business passes the viability test, then the arbitrator is required to decide whether or not to grant relief from payment of some or all of the protected rents, and whether the tenant may pay in instalments. The arbitrator must ask themselves two questions in making the award:
- Will relief preserve the tenant's business?
- Will the landlord's solvency be compromised by the tenant's relief?
However, these questions should be answered in the context of the assumption that the tenant should be required to comply with its contractual obligations, taking into account the answer to the two questions.
Whilst the Bill may be amended on its passage through both Houses of Parliament, it is clear that the government expects big landlords to sacrifice profitability in order to save the "little guy". However, it is hoped that larger tenants will not receive a windfall from the arbitration award, and that the arbitrator will keep at the forefront of their minds the Bill's assumption that parties to contracts should comply with their agreed obligations.
The arbitration may take place by written submission or by oral hearing, and the parties are expected to meet the arbitration fees - details of which are yet to be announced - equally, although the arbitrator has a discretion to make a different award.
The government hopes to get the Bill on the statute books before the restrictions on landlords' remedies for non-payment of protected rents end on 22 March 2022. When the Bill comes into force, it will impose a six month moratorium on all enforcement action for protected rents, although if an arbitration award unfavourable to the tenant is made, enforcement may be made after that. The moratorium may be extended beyond six months, if the government deems it necessary.
Once the Bill has been enshrined in law as an act of Parliament, the Act will however be retrospective, as it will prevent enforcement measures from 10 November 2021; issued claims for protected rents will be stayed on the application of one of the parties and any judgment for protected rents will not be enforced if the tenant elects for the arbitration process. This protection also extends to guarantors. The Bill does not propose to re-open concluded agreements between landlord and tenant relating to the protected rents, and landlords may still enforce against tenants who default on post-pandemic rents or are in breach of other lease covenants.
During the moratorium, landlords will not be able to draw down on rent deposits, and where they have previously done so will not be able to require tenants to top up the deposit balance. Any rent deposit that has been used towards discharging protected rents will be treated as unpaid unprotected rents due from the tenant to the landlord.
In a situation where a tenant owes the landlord both protected rents and rents accrued since it has started trading after the pandemic restrictions were relaxed or restricted, the landlord may not apportion paid rents to the protected period, and any such apportionment will be ineffective. This applies until the end of the moratorium, settlement or the grant of an arbitration award. Tenants are expected to specify the period to which the paid rent relates, and if they do not then the landlord must apply the payment to non-protected rents. The Code does state that protected rents cannot be included in any tenant restructuring processes (CVA, schemes of arrangement etc) once an arbitrator has been appointed, and for 12 months from the date of conclusion of the arbitration. In addition, the Code states that when the Bill is enacted landlords will be able to make use of enforcement provisions which are currently suspended until 25 March 2022 (forfeiture, CRAR etc). The enforcement will only apply to rent arrears accrued before March 2020 or once the ring-fenced period for protected rents have ended, and will not apply to any rents covered by an arbitration process.
There is little to cheer landlords in either the Bill or the new Code. The Code urges transparency and good faith between the parties, but there does not seem to be any room for the arbitrator, or anyone else, to punish refusal to engage, obfuscation or cynicism. The uncertainty of the new arbitration system and the inevitable associated costs may persuade landlords reluctantly to cut their losses and do a deal with the tenant, although the cautious landlord may fear setting a precedent for future pandemics or similar events. The Bill's draftsperson certainly one had eye to the uncertain future; the final provisions of the Bill include a power for government to apply the provisions of the Bill to future outbreaks of the coronavirus.
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe - Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2021. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.