This is the second part in this two-part series co-authored by members of the Property and Insolvency Teams at Gatehouse Chambers considering some of practical difficulties with the Commercial Rent (Coronavirus) Bill 2021-22 as currently drafted. Part 1 can be found here.
Having been introduced by the Government on 9 November 2021, the Bill passed through the Committee stage in the House of Commons in late 2021. Notwithstanding detailed submissions by the Property Bar Association and the Property Litigation Association highlighting various difficulties with the Bill as drafted, it passed the Committee stage without any substantial amendments on 14 December 2021. The draft Bill is currently before the House of Lords. It remains to be seen what, if any, amendments are made to the Bill as it passes through its remaining legislative stages in the next two months. However, in light of the Government's large majority, it seems likely that the Bill will become law on 25 March 2022 substantially in its current form.
This article will focus on the workings of the arbitration scheme as currently envisaged by the Bill, the potential problems, and what steps landlord and tenants may want to take now to protect their position before the Bill becomes law.
Commencing the arbitration process
The Bill provides that where a business landlord and tenant cannot agree on how to deal with protected rent debts, either of them will be permitted to refer the matter to arbitration within 6 months of the passing of the Bill to a body approved by the Secretary of State (Clause 9). Sounds straightforward enough. But the current wording of the Bill throws up various thorny issues.
First, the definition of 'business tenancy' in Clause 2(5) of the Bill is a tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies. It follows that only landlords and tenants of premises which are "occupied for the purposes of a business carried on by [the tenant]" are eligible to use the arbitration procedure. This limitation is surprising, as it means that a commercial tenant who sub-let to another commercial tenant cannot claim the protections of the Bill against the ultimate landlord. It is assumed that the 1954 Act criteria would need to be met on the date when the relevant rent arrears fell due. As property lawyers know, whether these criteria are met at any given time can be a vexed question.
Further, Clause 2(2)(b) of the Bill provides that reference to the "landlord" includes a person acting for the landlord, such as a managing agent. These words do not appear to extend to a third party management company to whom some or all service charge is paid.
These uncertainties as to who can use the arbitration procedure will need to be clarified and it seems likely that there will be a fair bit of satellite litigation about whether a particular tenant qualifies for protections.
Secondly, there is no definition as to what constitutes a 'reference to arbitration' in the Bill. It may be that all that is needed is simply a request made to an approved body to appoint an arbitrator, but this is far from clear from the language of the Bill. Clause 10 of the Bill further provides that before making a reference to arbitration, the tenant or landlord "must" notify the other party of their intention to make a reference, and give them 14 days to respond. If this is a mandatory precursory before a 'reference to arbitration' can be made, then in practice the time-limit for commencing the 'arbitration process' will be 5 months from the introduction of the Bill, not 6 months (i.e. it is likely that the process of notifying the other party must be commenced before 25 August 2022 subject to any extension by the Minister). With the tight deadlines provided for in the Bill, whether certain steps constitute a valid referral is another area which seems ripe for potentially urgent satellite litigation.
It is also important to note that a reference to arbitration cannot be made (or, if already made, cannot be progressed) if the tenant is going through certain insolvency proceedings (a company voluntary arrangement, individual voluntary arrangement, or a Companies Act 2006 insolvency compromise or arrangement) which relate to the protected rent debt. Whilst it is possible to see the merit in this provision in, say, a 'landlord only' CVA where the significant purpose of the CVA is to address rent arrears and indeed rent going forward, the merit of the provision is far more difficult to discern in a company wide CVA (or IVA) where to prevent the tenant access (and thereby effectively the creditors) to this ostensible short cut to a determination of the protected rent arrears to be accounted for in the CVA doesn't seem justifiable.
The arbitration process
Clause 11 provides that the person (landlord or tenant) making a reference to arbitration must send with the reference a formal proposal for dealing with the protected rent debts (such as a payment plan or proposal to write some debt off), along with "supporting evidence". This must be sent to the arbitrator and the other party.
The other party then has 14 days to submit its own formal proposal together with supporting evidence. After that, each party then has 28 days to put forward revised proposals with "any further supporting evidence". These 14 and 28-day deadline are extendable if both parties agree or by the arbitrator if they think it reasonable to do so.
The arbitrator is then tasked with making an award on paper or at an oral hearing, if requested by one or both parties. Clause 13 provides that the arbitrator "must" dismiss the case if they find that the tenant's business is not "viable", and would remain unviable regardless of any award they make. If, however, the business is viable (or could become viable if given appropriate relief from rent), the arbitrator should consider whether to make an award on relief from payment.
Clauses 14- 16 of the Bill set out how decisions should be made applying two principles. The first principle is that the award should be aimed at preserving the tenant's business (if it is viable) or restoring and preserving it (if it is not currently viable, but could be if given the right amount of relief from payment). This must be done so far as it is consistent with preserving the landlord's solvency.
When assessing whether the tenant's business is viable, the arbitrator should consider the tenant's assets and liabilities, previous rental payments made, the impact of coronavirus on its business, and any other information on the tenant's financial position they consider appropriate. In assessing the landlord's solvency, the arbitrator must consider the landlord's assets and liabilities and any other information on the landlord's financial position they consider appropriate (Clause 16). It is not difficult to see, whatever definition might be applied to the term 'viable' the extent of the enquiry that the arbitrator may be required to undertake.
The second principle the arbitrator must apply when making an award is that, so far as it is consistent with the first principle, the tenant should be required to pay its rent debt in full and without delay.
As discussed in Part 1, there are real difficulties arising out of the undefined terms "viable" and "solvent". Further, the procedure set out in the Bill has the real potential for procedural unfairness and more satellite litigation.
First, Clause 14 fetters the arbitrator's discretion when making an award by reference to any "final proposal" made by the parties under Clause 11. The arbitrator must consider the proposals put forward by both parties, and "must" make the award set out in the proposal that is more consistent with these two principles. It is only if neither proposal is consistent that the two principles that the arbitrator has a discretion to make a different award by applying the "two principles".
However, notwithstanding the importance of the parties "proposals", the arbitration procedure does not impose any disclosure obligations on the parties. All that is required is that a formal proposal appends "supporting evidence". There is no requirement to provide evidence or any disclosure of evidence or documents "adverse" to a proposal. This is particularly problematic as it seems very likely that an assessments of "viability" and "solvency" will involve various documents not in the public domain and are therefore not accessible to counterparties or the arbitrator, such as management accounts pre- and post- pandemic, bank accounts, employment records, pay records, lending obligations and terms etc.
Further, the process of a party having the right to append supporting documents to a revised proposal is very likely to result in relevant evidence being provided by a party only after the "final proposals" have been submitted by the other party. This seems inherently unfair..
Finally, the Bill does not allow the arbitrator to take into account the interest of third parties. For example, in mixed use developments, service charges are often paid by commercial units towards the estate management in common with leaseholders of flats. The interests of such other payers into a common service charge fund do not appear to be a factor which the arbitrator can take into account when making an award.
The arbitration process as it is currently framed therefore has the potential to result in both satellite litigation and inherent unfairness to the parties.
Costs and oral hearings
The Bill provides that the Secretary of State has the power to
legislation specifying limits on the fees of arbitrators and arbitration bodies, so watch this space.
Generally, the person making the reference (the applicant) must pay these fees in advance. When making an award, the arbitrator can require the other party to reimburse the applicant for half of these fees, or such other amount they consider appropriate. Otherwise, each party must meet its own legal and other costs.
If one party requests an oral hearing, it must be held within 14 days of the arbitrator receiving the request (or such other period as the parties agree or the arbitrators considers appropriate). It will be interesting to see whether this will happen in practice. The party requesting the hearing must pay the costs of the hearing in advance, but can be reimbursed by the arbitrator for half of these fees (or whatever amount they consider appropriate) when making their award. Where both parties have requested the oral hearing, they are both responsible for its cost.
There is no power in the Bill to allow the arbitrator to award costs based upon the other parties' unreasonable conduct. This is an unfortunate omissions, as it is a helpful deterrent against parties acting unreasonably in litigation.
Of course, we have to remember that the Act and notes envisage that all of these issues will be dealt with in the course of an arbitration lasting no more than one day (!).
What to do now?
Once it has been established that the arbitration process applies to the tenancy in question, it is a good idea to start preparing for the arbitration. The timescales of the arbitration process are very tight. Once a referral is made, the counterparty must put in proposals with supporting evidence within just 14 days, with revised proposals submitted by the parties in successive two week periods. While time can be extended by agreement of the parties, there may be tactical reasons why one party refuses to do so. If your client has all its duck in a row, it seems unlikely that it would make tactical sense to agree an extension to the other party.
Tenants will want to start collating financial documentation to establish that the business is "viable". If the business is not viable, then consideration must be given to how much rent relief would be necessary to make the business "viable" and the time frame for payment. Consideration should be given to whether an expert report is necessary.
Landlords will need to amass evidence of its "solvency" either on a cash flow or a balance sheet basis (or perhaps both in the Re Casa Estates sense); again consideration should be given to whether an expert report is necessary.
Where either Landlord or Tenant are sizeable entities there may well be some difficult conversations at a strategic board level as to what approach is to be taken to viability / insolvency. A significant landlord for instance may not want to argue insolvency to recover protected rent from one site. If however it is part of a greater assault on a significant element of that landlord's income for the last 18 months, it may be that some disclosure of the wider impacts of the tenants proposal would be seen as appropriate. The sooner those difficult conversations begin (and indeed data collected) the more prepared clients will be if they are faced with a referral.
It will also be prudent to start asking for disclosure of financial information from the landlord or tenant in the course of negotiations, so to ensure that the initial "proposal" is consistent with the "two principles". If the information requested is not forthcoming, then the request for disclosure can be used to attack the other parties' evidence on credibility grounds once the process is afoot.
In light of the many uncertainty of the process itself, landlords and tenants are well advised to try to come to some arrangement without the launch into the new arbitration process. With sweeping powers of the arbitrator and no prospect of cost recovery, it seems like a risky procedure to start for both landlords and tenants.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.