In November, the government drafted a new piece of legislation, due to come in place in March 2022, intended to resolve disputes between commercial landlords and tenants relating to the payment of Covid-19 rent arrears.
Simon Waterfield, partner and specialist property dispute solicitor at Nelsons, looks at the Commercial Rent (Coronavirus) Bill and discusses the chaos that could occur in the transition period between legislation.
What is the Commercial Rent (Coronavirus) Bill? The Commercial Rent (Coronavirus) Bill is legislation issued by the government last month, which comes into force in March 2022, subject to its passage through Parliament, and is intended to resolve disputes between commercial landlords and tenants relating to the payment of Covid-19 rent arrear payments.
The bill applies to England and Wales and has been introduced as a result of the estimated £7.5bn rent arrears due to landlords across the real estate sector.
The definition of ‘rent’ includes service charges, late payment interest, insurance rent, and the requirement to top-up rent deposits where the landlord has drawn down on the deposit to cover rent debts accrued during the ‘protected period’.
The bill will enable landlords and tenants to apply to an arbitrator to resolve any disputes regarding the ring-fenced rent debts and is supported by a new Code of Practice. This code offers guidance on how parties should resolve Covid-19 commercial rent disputes. The guide aligns with the bill, providing additional guidance on how parties should negotiate, and sets out:
· What the arbitration process will look like;
· The type of evidence considered;
· The key principles of fairness;
· Affordability; and,
· The viability that it will adhere to.
Who is affected?
The bill and code will apply to commercial rent debts related to the mandatory closure of businesses - for example gyms, pubs, restaurants, retail (including supply chains), leisure, manufacturing, industrial and logistics, and sports - during the pandemic. However, debts accrued at other times, outside of the ‘protected period’, will not be included. The bill will also not apply to tenants who voluntarily chose to close during that period.
If a tenant already has compromised Covid-19 rent arrears under a Company Voluntary Arrangement (CVA), then they cannot apply for arbitration for those arrears. This may also prevent the scheme from being relied upon by tenants who implemented CVA’s before the outbreak of Covid-19, where the CVA-discounted rents have continued to apply during the pandemic. Also, a tenant would not be allowed to propose a CVA for 12 months after a referral to the scheme has been made either.
‘Protected period’
A ‘protected period’ refers to the period during which the tenant’s business was subject to restrictions as a result of coronavirus regulations. In England, the protected period commenced on 21 March 2020, lasting until 18 July 2021, including the last day on which the tenant’s business was subject to restrictions.
However, the bill does not appear to consider multiple protected periods. For example, tenants who were able to open in England during summer 2020 but were then forced to close again, can treat the whole of the period through to when they were allowed to re-open again in the spring/summer 2021 as a protected period.
Furthermore, protected periods include a period during which any ‘specific coronavirus restriction’ is applied to the business. For example, hospitality will include periods during which there were limits in place, such as the limit on the number of households and the size of parties.
Regarding non-essential retailers, the relevant date is likely to be 12 April 2021.
Can we agree?
Landlord and tenants are not obliged to negotiate rent arrears under the new scheme. However, if an agreement cannot be reached, either party can apply for the matter to be referred to the binding arbitration scheme.
The process can be quite long and is split into sections, the first of which is a letter of notification by either party, including a proposal for settlement of the rent arrears in line with the new code. The other party will then have the opportunity to accept or respond with a counterproposal. If this does not result in an agreement, an application for arbitration can be made.
The other party has 14 days to submit their own proposal and both sides are encouraged to include evidence. The parties will then have the option to request a public hearing for the arbitration, which the arbitrator will seek to conduct within 14 days. If no request is made, the arbitrator will consider the matter based on the documents provided.
Finally, both parties will be notified of the award made within 14 days of the arbitration hearing and the arbitrator’s award will be legally binding. When deciding what award to make, the arbitrator will assess the proposal and evidence submitted by both parties in accordance with the principles, viability, and affordability set out within the new code. For example, if the arbitrator considers one of the proposals to be in line with those principles, they will make an award on those terms or if both are in accordance then it simply comes down to whichever is most consistent.
Principals
Section 15 as currently drafted requires the arbitrator to balance restoring or preserving the viability of the business so far as it is consistent with preserving the landlord solvency.
How to apply this balancing act will no doubt be the subject of fierce debate.
Continuing to court
If the landlord issues court proceedings before 10 November 2021 then they are still entitled to continue with those proceedings. However, if the landlord issued proceedings on or after 10 November 2021, the tenant would then have the right to ensure that proceedings are stayed, pending arbitration.
Looking ahead
The government has now drafted this new piece of legislation, which should minimise some chaos when the emergency moratorium comes to an end.
However, it is still inevitable that there will be a significant backlog of disputes and it is still undecided who the arbitrators will be. The government might have to draft in temporary arbitrators to help manage the caseload.
There is also uncertainty around debts outside of the protected period and the general transition period to the new legislation, so it is vital for both landlords and tenants to start planning now and to start communicating with each other.
