Edward Blakeney and Mattie Green look at the likely impact of the Commercial Rent (Coronavirus) Bill.
On 9 November 2021, the Government introduced the Commercial Rent (Coronavirus) Bill (“the Bill”) and a Code of Practice in relation to commercial rent debts which accrued because of the pandemic.
There is a lot to unpack from the Bill, which is in the early stages of passage through Parliament, but in short the Bill legislates a scheme of statutory arbitration between landlords and tenants under a business tenancy in relation to a matter of relief from payment of a protected rent debt and provides for temporary restrictions on the availability of certain remedies and insolvency arrangements during a moratorium period.
The new laws are set to be introduced in March 2022, but the Bill could impact any relevant claim made, or judgment given, on or after 10 November 2021.
We’ll be looking at the potential changes imposed by the Bill in a 3-part series divided into the following topics:
- Part 1 – Definitions in the Bill and the Arbitration scheme
- Part 2 – Enforcement of protected rent debts and insolvency arrangements
- Part 3 – the Code of Practice
There are several key definitions set out in Part 1 of the Bill:
- “Rent” means an amount consisting of one or more of the following (section 2(1)):
- An amount payable by the tenant to the landlord for possession and use of the premises;
- Service charges (as defined by section 2(2)(c); and
- Interest on an unpaid amount within section 2(1)(a) or (b).
- “Business tenancy” means a tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies (Section 2(5)).
- A “protect rent debt” is a debt under a business tenancy consisting of unpaid protected rent. (Section 3(1)). Rent is “protected rent” if the tenancy was adversely affected by coronavirus; and the rent is attributable to a period of occupation by the tenant for, or for a period within, the protected period applying to the tenancy.
- A business tenancy was “adversely affected by coronavirus” if for any of the relevant period, the business was subject to a closure requirement (section 4(1)). A ‘closure requirement’ includes a requirement to close only at particular times, and it is immaterial that certain activities were still allowed despite the obligation to close.
- The “protected period” largely shares its definition with “Relevant Period”, and is the period beginning on 21 March 2020 and ending on 18 July 2021 in England or 7 August 2021 in Wales, or the last day on which the business or premises or part thereof of the tenant was of a description subject to a closure requirement or a specific coronavirus restriction (whichever is earlier).
The Arbitration Scheme
The Secretary of State may approve one or more bodies to carry out the functions set out in section 8, including maintaining a list of arbitrators who are available to act as arbitrators under Part 2 of the Bill and who appear to be suitable by virtue of their qualifications or experience. Currently, there is no guidance as to what those ‘qualifications’ or ‘experience’ may be.
Landlords and tenants will have six months beginning with the day on which the Bill is passed to make a reference for arbitration on a matter of relief from payment of protect rent debts. A “matter of relief from payment” includes all issues relating to the questions: whether there is a protected rent debt of any amount, and if so, whether the tenant should be given relief from payment of that debt, and if so, what relief (section 6(1)).
There are strict timescales in which a party must notify the other party of their intention to make a reference and for responding to the notification.
A reference to arbitration must include a formal proposal (backed up by evidence) for resolving the matter for relief.
Arbitrators will dismiss the reference if the parties have resolved the matter by agreement, the tenancy is not a business tenancy or there is no protected rent debt (section 13(2)). The reference must also be dismissed if the arbitrator determines that the business is not viable and would not be viable even if the tenant were given relief from payment of any kind (section 13(3)). If the arbitrator determines that the business is viable or would become viable if the tenant were given relief from payment of any kind, the arbitrator must consider whether the tenant should receive relief from payment and make an award in accordance with section 14 (section 13(4) and (5)).
Relief from payment includes writing off the whole or part of the debt; giving time to pay, including allowing payment by instalments; and reducing any interest payable on the debt (section 6(2)).
The proposals put forward by the parties at the start of the reference will be particularly important because the arbitrator must consider these before determining what award to make (section 14(2)). If one proposal is consistent with the principles in section 15, but the other is not, the arbitrator must make the award set out in the proposal which is consistent with section 15. If both proposals are consistent with the principles in section 15, the arbitrator must make an award as set out in whichever proposal is most consistent. Therefore, parties have the potential to control what award the arbitrator makes provided their proposal is consistent, or most consistent, with the principles in section 15.
Those principles are:
- Any award should be aimed at preserving (in a case falling within section 13(4)(a), or restoring and preserving (in a case falling within section 13(4)(b)), the viability of the business of the tenant, so far as that is consistent with preserving the landlord’s solvency; and
- That the tenant should, so far as it is consistent with the first principle, be required to meet its obligations as regards the payment of protected rent in full and without delay.
In assessing viability and the landlord’s solvency, an Arbitrator must disregard anything done by the tenant or the landlord with a view to manipulating their financial affairs to improve their position in relation to an award to be made under section 14.
When an award is made which gives the tenant time to pay, that period must not be longer than 24 months.
It is clear from the Bill that the parties are encouraged to reach an agreement outside of the arbitration scheme. Section 1(3) provides that nothing in the Bill is to be taken as affecting the capacity of the parties to resolve the matter of relief from payment by agreement or preventing an agreement from being enforced. If the parties reach an agreement, the arbitrator must dismiss the referral.
A party that does not want to be bound by an arbitrator’s decision will be incentivised to reach an agreement with the other party before the Bill comes into force.
The requirement for the parties to make proposals encourages settlement because if a party makes an offer which is consistent with the principles in section 15, the other party may well accept it to avoid going through the process of arbitration with an inevitable conclusion and incurring costs (with the Bill specifically stating that each party is to bear their own costs – see section 19(6)). Therefore, the number of cases which actually reach arbitration may be limited. The importance placed on settlement proposals also leads to tactical considerations (both for a landlord and tenant) as to who makes the first offer, when it is made and the contents of an offer.
Landlords and tenants ought to consider settlement options before the Bill comes into force. Given the limited period to make a referral, tenants may be quick to start the process after the new laws are introduced. Parties will need to start considering whether they are more likely to reach a preferrable outcome between themselves or through the new arbitration process.
If matters do proceed to an arbitration under the Bill, the statutory scheme of arbitration is in stark contrast to arbitration as we know it, which at its core is a consensual process which requires agreement between the parties to arbitrate. The provisions under Part 2 make arbitration mandatory when the parties may have agreed at the outset not to include an arbitration clause in the lease.
Interestingly the press release published on 9 November 2021 stated that “the result of the arbitration process will be a legally-binding agreement the landlord and tenant must adhere to…”. However, any award made under section 14 will not be an agreement and moreover, where the parties have reached an agreement, the arbitrator must dismiss the referral.
Furthermore, the arbitration award is to be made public (although with confidential information excluded), and any oral hearing is to be held in public unless the parties agree otherwise. This, presumably, is to reinforce notions of open justice but it may be another incentive for parties to settle rather than going through a process and airing details they’d rather keep private.
The above is subject to change as the Bill proceeds through parliament, and certainly it will be interesting to see what elements of the scheme tenants and landlords find most relevant and/or challenging.
However, it seems more than apparent that the government is placing this new arbitration scheme front and centre and it is highly probable that it will continue in some shape or form. That is especially so when one considers the restrictions proposed by the Bill on the enforcement of protected rent debts and insolvency arrangements. We explore this in Part 2 of our mini-series.
Be sure to keep an eye out for what’s to come!