Not content with one major announcement, the Government has also announced a new Code of Practice to sit alongside the Bill and encourage certain behaviours in negotiations. Part one of our analysis considers the Bill and how the arbitration process will work.
Despite its length, this is a “high-level” overview – the devil is in the detail and advice should still be sought. The Bill is of course not an Act, and so this analysis is based on the Bill becoming law in its current guise. We will revise our analysis as the Bill evolves further.
What is the Bill?
The purpose of the Bill is neatly summarised in its opening paragraph; it “enables the matter of relief from payment of protected rent debts due from the tenant to the landlord under a business tenancy to be resolved by arbitration (if not resolved by agreement)”.
What is the definition of rent?
Any amount payable for “possession and use”, service charges (including insurance costs) and interest on those sums. Rent deposit shortfalls also satisfy the definition.
When will rent be “protected”?
Unpaid rent is protected if:
- The tenancy was “adversely affected by coronavirus”; and
- It accrued during the “protected period”
What is the “protected period”?
The protected period begins on 21 March 2020 and ends on 18 July 2021 in England and 7 August 2021 in Wales, unless legal restrictions applying to the tenant’s specific business were lifted earlier through separate regulations.
What does ”adversely affected by coronavirus” mean?
A tenant was adversely affected by coronavirus if the whole or part of its business/premises was subject to a “closure requirement” during the protected period. Regulations must have imposed the closure, and it is irrelevant if “specific limited activities” were still permitted, though there is no definition of that phrase.
What constitutes “relief from payment”?
The Bill aims to address whether a tenant should be given relief from payment of a protected rent debt. Relief could mean one or more of:
- Writing off debt
- Deferring payments or paying by instalments
- Reducing or writing off interest on the debt
Appointment and Functions of Arbitrator
The Government will appoint approved arbitration bodies – a list will be published online. Those bodies will maintain a list of approved arbitrators with suitable qualifications or experience.
Those arbitrators will be appointed to consider applications for relief from protected rent debts.
When can an application be made?
If landlord and tenant cannot agree (and they should try), arbitration can be triggered by landlord or tenant applying. That application must be made within six months of the day the Bill becomes law.
Given the levels of unpaid protected rent, this will mean a lot of applications in a short period of time – those considering a career change might be wise to take that arbitration course ASAP.
What are the pre-conditions for applying?
One party must notify the other of its intention to apply, triggering a 14-day response period.
If the other party responds, an application may be made at least 14 days after the date of response. If there is no response, an application may be made 28 days after the notification.
Can all business tenants apply?
Tenants (including LLPs) cannot apply if they are subject to:
- An approved CVA which relates to the protected rent debt
- An approved IVA which relates to the protected rent debt
- A compromise under the Companies Act 2006 which relates to the protected rent debt
The application must contain proposals for dealing with the rent – typically waiver, deferment and/or reduction. The other party may submit counterproposals within 14 days and both proposals must be supported by evidence (e.g. a witness statement). If either party wishes to revise its proposal, it may do so within 28 days of its initial proposal. Extensions can be agreed or imposed by the arbitrator.
Can the Arbitrator dismiss an application?
Yes, and it will readily dismiss an application if it transpires there is already a binding agreement in place or the qualifying criteria is not met.
What if the tenant’s business is unviable?
This is the first question an arbitrator must consider – an application will be dismissed if the tenant’s business is considered “not viable” and would still not be viable if relief was granted. Viability is assessed at the time of the arbitrator’s assessment. Businesses which were viable in March 2020, but no longer are, will face difficulties.
Conversely, an application will proceed if the tenant’s business is considered viable, or will become viable as a result of relief from payment being awarded.
Expect this to be a crucial battleground – financial evidence will be key, and tenants will need to prove they have (or will have) a sustainable business after relief.
Section 16 sets out the factors an arbitrator may consider when assessing viability – e.g. assets/liabilities, previous payments, the impact of coronavirus on the business and any other financial information.
What can the Arbitrator award?
If the tenant clears the viability hurdle, the arbitrator has two questions to answer:
- Should the tenant receive relief; and
- If so, what relief?
Parties and their advisors will need a good working knowledge of those principles– if a proposal is closely tailored to them, it stands a chance of succeeding. Failure to put forward counterproposals will risk the arbitrator rubber-stamping the initial proposal. Not responding is not a good idea.
What are the key principles?
If the tenant’s business is viable, the award must aim to preserve that viability. If it is not viable, but could be as a result of relief, the award should aim to restore and preserve viability.
In both cases, the landlord’s solvency should be preserved. Section 16 lists the factors relevant to considering landlord solvency – assets/liabilities, other tenancies, and any relevant financial information.
Underpinning the above is the principle that a tenant is expected to meet its obligations in full without delay. Clearly, an application would suggest payment in full without delay is not possible. The arbitrator will need to resolve these tensions.
Any attempts by either party to manipulate financial records to improve their arbitration position will be disregarded.
Deferred payments – Is there a time limit?
Yes – the arbitrator cannot suspend payment for longer than 24 months.
Is the award confidential?
No – an award will be published alongside the reasons for making it but excluding any confidential information which may harm business interests or private affairs. Parties who do not want this sort of publicity will need to reach agreements outside of arbitration.
What will it cost and who pays?
Arbitration costs are TBC, but the Government has the power to impose fee caps.
The applying party pays the arbitration fees. If an award is made, the other party will be ordered to cover an appropriate portion of those fees – most likely 50%.
If there is an oral hearing, the party making the request pays the hearing fee, or they are split if both parties make the request. The arbitrator can make the same order above if an award is then made.
Parties are responsible for their own legal costs – there is no risk of an adverse costs order of this nature, which may encourage parties to make applications.
Will there be an oral hearing?
Yes, but only if either/both parties request one. Once the request is made, an oral hearing will be set within 14 days of the request – a quick turnaround which emphasises the need to be prepared before making the request. That period can be extended by agreement or imposition. Hearings are in public, unless agreed otherwise.
Will there be restrictions imposed on a landlord’s enforcement remedies?
Yes, there will be restrictions during a new “moratorium period”. Existing restrictions will remain in place in the meantime.
The new moratorium will begin from the date the Bill becomes law, and will end on:
- The deadline for applying for arbitration; or
- The date the arbitration concludes by dismissal, withdrawal, abandonment, or determination of an appeal
Landlords cannot do any of the following during the moratorium, in relation to protected debt:
- Issue a debt claim
- Exercise CRAR (or issue a notice of enforcement)
- Forfeit for non-payment of a protected debt (although a landlord will not waive its right to forfeit during the moratorium, other than in writing)
It can be – If a claim is issued after 10 November but before the Bill becomes law, either party may apply for that claim to be stayed pending resolution of the protected rent debt payment. That could be for arbitration “or otherwise”. The Court must stay the proceedings if it receives an application.
What if a Judgment is obtained before the Bill becomes law?
If Judgment is obtained after 10th November, but before the Bill becomes law, relief is still available through arbitration and that Judgment will constitute a protected debt.
The Judgment cannot be enforced before the end of the moratorium period and, if relief is granted, the Judgment will be varied by reference to that award. An arbitrator can effectively vary a court order.
Are commercial lease renewals affected?
Yes – a landlord can oppose a new lease due to persistent delays in paying rent (Section 30(1)(b) of the Landlord and Tenant Act 1954).
If it does so, any delays or failure to pay protected rent “during the moratorium period” must be disregarded. If the moratorium lifts without resolution, this restriction will fall away. Tenants with protected debt approaching lease renewals will need to prioritise a resolution before the moratorium ends.
Allocation of payments between protected/unprotected debts
If a tenant makes a payment during the moratorium period, the landlord must apply that payment to unprotected debt first, if the tenant is in arrears of protected and unprotected rent.
Are tenant deposits affected?
Yes – during the moratorium period, the landlord may not draw down from a tenancy deposit to pay unpaid rent debts. Tenants will not need to top up the deposit during the moratorium, if previous deductions have been made.
What about other arbitration options – are they available?
No other arbitration proceedings can be initiated during the moratorium period. Other options are back on the table once the period has passed.
What about insolvency arrangements?
The following options are not available during the “relevant period”, in relation to all/part of the protected debt:
- A proposal for a CVA
- A proposal for an IVA
- An application for an interim order
- An application for a compromise or arrangement under the Companies Act 2006
The relevant period begins on the day an arbitrator is appointed and ends:
- 12 months from the date of an award, if one is made
- The date of the dismissal of the application
- The date an award is set aside on appeal
- The date an application is abandoned or withdrawn
During the moratorium period (see above), a landlord cannot petition to wind up a company (or LLP) tenant on the basis the company is unable to pay its debts.
These restrictions do not apply to unprotected debts.
What about a petition for bankruptcy?
Similar restrictions apply but from 10 November 2021. A landlord cannot petition for bankruptcy following service of a demand or obtaining a Judgment which related to protected debt. Special rules apply for orders made after 10 November 2021 which could result in those orders being set aside.
What does the future hold?
The Bill addresses the possibility of future lockdowns and preserves the right to re-impose the arbitration process in relation to debts resulting from future closure requirements. We can only hope that right never needs to be exercised…