By James Walters, Associate Solicitor in Irwin Mitchell's Real Estate Disputes team.
The Commercial Rents (Coronavirus) Bill sets out a framework for two important legal changes:
- A compulsory arbitration process to resolve landlord and tenant disputes regarding unpaid rent debts which arose due to the tenancy being adversely affected by the pandemic. The arbitrator can make “awards”, legally-binding decisions, about whether and to what extent the disputed rent must be repaid. Critically, the arbitrator’s powers include the ability to reduce or write off the debt that the tenant owes and/or extend the time for payment by a maximum of 24 months.
- A moratorium period during which landlords cannot recover such debts from their tenants.
The Government has also issued a new Code of Practice setting out how landlords and tenants should approach their discussions over the unpaid rent, including an expectation that they will act “reasonably, transparently and in good faith”. While the Code is not legally binding, the court and any arbitrators will take the guidance into consideration when making their decisions.
Here are 10 key points for landlords to take away from the draft Bill. My comments only relate to commercial tenancies in England – different provisions apply to commercial tenancies in Wales and Scotland.
- What tenancies are covered? Tenancies to which Part II of the Landlord and Tenant Act 1954 (“1954 Act”) applies. This will include tenants with security of tenure and tenants with contracted out tenancies, but will exclude tenancies which the 1954 Act does not apply to and also licences to occupy property.
- What rent debts are included? The scheme only deals with disputes over “protected rent”. This includes “pure” rent, service charges and interest on rent or service charges, which fell due:
a) between 21 March 2020 and 18 July 2021 (or, if earlier than 18 July 2021, the last day on which any specific coronavirus restrictions which applied to the tenant’s business were in force)
b) at a time when the tenant’s business or their business premises were required to close (either entirely, or in part) or where they were subject to a specific restriction on the way their type of business could be run or the way in which their type of premises could be used.
- Making the referral. Either the landlord or the tenant can refer the dispute to an arbitrator by giving notice to the arbitrator and the other party, but must do so within 6 months of the date that the Bill becomes law (although the Government can extend this deadline). The person referring to the arbitrator needs to submit a formal proposal at the same time, which is their opening offer. The other party can provide a formal proposal in response within 14 days. Either party can revise their formal proposals within 28 days of making their first formal proposal.
- Grounds for dismissal. The arbitrator must dismiss the referral in a number of cases, including if it appears that the tenant’s business is not viable, and would not be viable even if the tenant were to be given relief from payment. This is aimed at preventing tenants with non-viable businesses from being able to claim a reduction in the rent that the owe. It is not clear how the arbitrator is to assess the viability of the tenant’s business in practice. It may require the parties to instruct expert witnesses to assist them.
- Making the award. Any award that the arbitrator makes must be aimed at preserving/restoring the viability of the tenant’s business “so far as that is consistent with preserving the landlord’s solvency”. The policy behind this principle is clearly to help viable tenant businesses to survive, with the burden of the unpaid rent being put onto landlords. Unfortunately for landlords, unless they are claiming that the non-payment of rent is affecting their solvency the wording suggests that the arbitrator will make an award which writes off some or all of the protected rent.
- Fees and costs. The person referring to the arbitrator (or requesting an oral hearing, if they require one) needs to pay the fees up front, but they can claim back at least some of them from the other party if the arbitrator makes an award. The Bill provides that the parties must meet their own legal or other costs. Landlords will need to carefully consider how and when they incur costs in relation to any arbitrations, since they are unlikely to be able to recover them from their tenants.
- Moratorium on the recovery of protected rent debts. This will apply from the date that the Bill becomes law until either 6 months from that date (subject to the Government’s power to extend the deadline) or, if the matter has been gone through the arbitration process, when the process concludes. This means that once the landlord has completed the arbitration process it is free to enforce any award that is made (assuming that the protected rent is not completely written off).
- Debt claims. Except for claims which were started on or before 9 November 2021, landlords are now prevented from making claims for protected rent against their tenants or enforcing any judgments made in those proceedings. If the landlord nonetheless commences proceedings the court must immediately stay the proceedings (either on its own initiative, or at the parties’ request).
- Commercial rent arrears recovery and forfeiture. Landlords cannot seek to forfeit or exercise CRAR on the basis of protected rent during the moratorium period.
- Insolvency proceedings. Landlords cannot present winding up petitions solely in relation to a protected rent debt, and also cannot present a bankruptcy petition which includes a protected rent debt, during the moratorium period. If a bankruptcy order is made against a tenant on the basis of a protected rent debt on or after 10 November 2021 but the before the Bill becomes law then the order will generally be deemed to be void.
The overall message for landlords is that they are most likely going to struggle to recover the full rent owed to them. They will need to carefully consider their options about if and when to commence arbitrations against their tenants. They should also endeavour to show that they have complied with the new Code of Practice. Landlords should make every effort to reach agreement with their tenants with a view to saving the additional cost, time and uncertainty that will be involved in the process, and also to assist with showing that they have complied with the Code of Practice. However if a landlord does commence an arbitration and receives an award for payment, then that payment will no longer be subject to the moratorium and the landlord can seek to recover it from the tenant.