Statutory Guidance published on arbitration process for COVID rent arrears

The Commercial Rent (Coronavirus) Bill 2021-2022 (the “Bill”) is currently making its way through parliament and set to be passed into law on 25 March 2022. Once the Bill is passed, a new arbitration scheme will be introduced to deal with COVID -19 commercial rent arrears that arose as a result of the requirement for non-essential businesses to close during the pandemic. In our previous articles on the proposed Bill (Parts 1,2 and 3) we explored the immediate impact of the Bill and discussed how we anticipate the new arbitration process playing out in practice. We also pointed out a number of problematic issues.

In terms of amendments to the Bill so far, provisions have been inserted to clarify: (i) that the party that has paid the arbitrator’s fees should be reimbursed half of the amount  (unless the arbitrator decides it should be a different proportion); (ii) other than the reimbursement of arbitration fees, each party is to bear their own legal and other costs; and (iii) other amendments have made clear that guarantors are to have the same protections under the Bill as tenants, in that they are not regarded as being in breach of covenant provided the tenant or they comply with the terms of the arbitrator’s award.

More recently, draft statutory guidance on the Bill was published on 23 February 2022 by the Department for Business, Energy & Industrial Strategy (BEIS) on how arbitrators should exercise their functions under Part 2 of the Bill. The scheme itself is unprecedented and grants significant powers to arbitrators to make awards and impose terms that take precedence over existing lease obligations. The draft guidance discusses the Bill’s provisions which are relevant to arbitrators and explains how arbitrators should carry out their role in the new process.

The key takeaways from the guidance include:

1. Once an arbitrator is appointed, his/her first task is to determine whether the dispute is eligible for the scheme. For example, the arbitrator must consider whether the tenancy is a business tenancy – that is a tenancy to which the Landlord and Tenant Act 1954 applies. The arbitrator must in their award dismiss the reference if the tenancy is not a business tenancy. Not including in the scheme of protection and arbitration business leases that are excluded from the Landlord and Tenant Act 1954 still seems somewhat surprising!
    
2. The arbitrator must assess the ‘viability of a tenant’s business’ and the draft guidance advises arbitrators as to how they should make the viability assessment. Viability is not specifically defined in the guidance so that all types of business models may be considered. The guidance advises that arbitrators should be mindful that viable business models will differ greatly across sectors – for example, profit margins will vary greatly between different industries.
   The guidance identifies processes and tools that are useful for arbitrators in considering viability. These include reviewing bank account information, a consideration of the net profit margin or gross profit margin before March 2020 compared to the end of the protected period and reviewing any future profit forecasts and considering the extent to which this may be relied upon.
    
3. When making their final award, the guidance advises that arbitrators should consider which of the parties’ final proposals is most consistent with the principle that either:

1. the award should be aimed at preserving or restoring the viability of the tenant’s business so far as that is consistent with preserving the solvency of the landlord; and

2. that the tenant should be required to meet its obligations to pay the protected rent debt in full and without delay (in so far as this is consistent with (i)).

This guides the arbitrator in considering the tenant’s viability against the solvency of the landlord.

The government has published the draft with a view to engaging with stakeholders in developing its contents. While this does mean that the guidance is subject to change, at this stage the guidance helpfully provides some insight as to how the proposed arbitration scheme is intended to operate, particularly in relation as to how arbitrators are to assess the ‘viability of a tenant’s business’. The above list of evidence an arbitrator is to consider when making their award will provide guidance to landlords and tenants who may be considering using the scheme once the Bill receives royal assent (expected 25^th March 2022). Given the Bill only provides a 6-month window for the arbitration scheme beginning from commencement of the Act, landlords and tenants may wish to get ahead and begin collating information and preparing proposals ahead of this date. 

Importantly, the current moratorium preventing a landlord from exercising CRAR, forfeiture and insolvency enforcement ends on the 25 March 2022. Landlords will likely be considering their options in respect of arrears owed by tenants generally and may concentrate on those tenants who are not protected as their businesses were not mandated to close during the pandemic.