On 25 March 2022 the laws which temporarily restrict landlords from pursuing indebted tenants are set to change. From that date, a commercial tenant will only be able to shield itself from enforcement action if a debt qualifies as “protected” in which case, it will be able to refer the dispute to binding arbitration to seek relief. This will be available for a period of 6 months from the new law, the Commercial Rent (Coronavirus) Bill 2022 coming into force.
What will be protected?
A protected debt is rent, a rental deposit top-up, service charge, VAT insurance or interest which has accrued under a business tenancy during a ‘protected period,’ where the tenant was adversely affected by coronavirus (i.e. forced to close).
The protected period is between 21 March 2020 and the last day on which the tenant was forced to close (broadly, 18 July 2021 in England and 07 August 2021 in Wales). The supplementary Code contains a helpful table to establish the end of the protected period, by business sector.
Qualifying for arbitration
A party will not be able to refer a dispute to arbitration if:-
- The tenancy is not a business tenancy
- There has already been an agreement reached between the parties
- The tenant is subject to an IVA/CVA or scheme of arrangement, or one is pending (‘deemed agreements’)
- The debt is not a protected debt
- The tenant’s business is not “viable” and would not be viable even if the tenant was given relief.
A Moratorium Period of 6 months will be in force, which may be extended by regulations. During the Moratorium Period, a landlord cannot, in respect of a protected debt:-
- Make a debt claim
- Use CRAR
- Forfeit the lease for unpaid rent
- Use a tenant’s deposit to pay protected debts
- Appropriate rent paid by the tenant to protected debts, it must apply any payment to non-protected debts first
- Wind up a tenant solely in relation to a protected debt
The arbitration procedure
Either party may serve a notice of intention to refer to arbitration on the other side during the 6-month period. That notice must be accompanied by a written proposal, supported by evidence and signed by a statement of truth, setting out the relief from payment required.
The other side will have a 14-day opportunity to put in a response, if it wishes. Within 28 days, the parties can submit revised proposals. These proposals are essential, as they will dictate and/or inform the arbitrator’s final decision.
A written proposal must be consistent with the arbitrator’s principles, as follows:
- Any award should be aimed at i) preserving or ii) restoring and preserving the viability of the business of the tenant so far as that is consistent with preserving the LL’s solvency; and
- The tenant should, so far as it is consistent with the principle above to do so, be required to meet its obligations as regards the payment of protected rent in full and without delay.
- All or part of the debt is written off
- The tenant be allowed time to pay/repay by instalments up to a maximum pay off period of 2 years
- Interest payable be reduced
Viability is deliberately not defined in the Act or the Code guidance supporting it – however, it is different to solvency or profitability. It is likely to be key battleground.
Viability is to be demonstrated by the tenant, by reference to evidence. Its particular business sector / industry should be taken into consideration. The Code also sets out factors and evidence that an arbitrator may wish to consider including assets, liabilities, and financial accounts.
An arbitrator must specifically disregard the protected debt when considering viability and anything done by the tenant to manipulate its financial affairs, borrow money or restructure its business.
An approved arbitration body will be responsible for appointing an arbitrator to deal with qualifying disputes. Parties will have an automatic right to an oral hearing; however, those hearings (and the decision) will be public.
The arbitrator’s function is far more extensive than the usual judicial function.
The arbitrator must make its decision based on the proposals made by the parties.
If both parties have made final proposals which are consistent with the arbitrator’s principles, the arbitrator must make the award which is the most consistent. If only one is, it must choose that one. If neither, it must make the award it considers appropriate consistently with the principles.
If only one party has made a final proposal, the arbitrator must make that award unless it is inconsistent, or make its own award (with reasons.)
The decision will be published with the reasons. The aim is to develop a body of ‘case law’ to ensure a consistent approach across cases.
Arbitration fees are payable by the party making the reference, in advance. A party who requests an oral hearing must also pay the fee upfront.
Parties will also be expected to bear half the costs of the arbitration (therefore a reimbursement award will be made), subject to some residual discretion on the part of the arbitrator to make a different award.
Parties will have to pay their own legal costs or other professional costs. Any contractual provisions will not be enforceable.
Should we issue a debt claim now?
Unfortunately, it is too late and from the passage of the new law, it will be prohibited. Any claim issued after 10 November will be automatically stayed and arbitration will be available for the defendant tenant. In fact, there is case law which suggests that even protected debt claims issued prior to 10 November which have not yet reached trial may be stayed.
If a judgment has already been obtained, but not enforced, the debtor may still apply for arbitration as enforcement is not available during the Moratorium Period. This means that arbitrators can effectively vary court orders.
What about guarantors?
The Bill only appears to contemplate statutory arbitration between the landlord and tenant. Payments recoverable from guarantors/former tenants are still capable of being protected rent debts – however it would appear that only the tenant or the landlord can make a reference to arbitration.
Once the Bill becomes law, further questions will likely emerge in practice. Of course, the Bill does not prevent parties from reaching their own agreements beyond the scope of the awards an arbitrator may make, if they prefer.
Landlords, tenants, and practitioners alike will be keen to see how the new legislation is interpreted and whether this, in turn, encourages tenants to pay (where they can) or for parties to reach their own agreements without incurring the expense of arbitration.
The Bill provides for the Moratorium Period to be extended, if necessary. Let us hope that it is not and resolutions can finally be reached.
A working draft has been published:
Knightsbridge Green Estate (2015) Limited v FSAFO Limited (Central London County Court 28 February 2022)