Coronavirus Rent Debt and the new Arbitration Scheme Part 3 – Mission Impossible?
UK Real Estate Insights
On 9 November the Government announced the arrival of the Commercial Rent (Coronavirus) Bill (“the Bill”) and accompanying new Code of Practice (“the new Code”). These are intended to assist landlords and tenants that are yet to reach a resolution in commercial rent arrears disputes brought on by the Coronavirus pandemic. As part of the new proposals, landlords or tenants will have the ability to apply to an arbitrator in a new binding arbitration process to settle disputes relating to the payment of ‘ring-fenced’ COVID arrears. We explained in Part 1 – “What is Changing” the important immediate implications for landlords and tenants and now concentrate upon the new arbitration process.
The new arbitration process will apply to unpaid rent arrears due under business tenancies, including service charges and interest, within a ‘ring-fenced’ period beginning from 21 March 2020. The end of the ring-fenced period will depend on when the last date restrictions were removed from the business tenant’s sector, that is, the earlier of 18 July 2021 or the date on which premises were able to continue trading and were not forced to close (see Annexure A to the new Code)
The arbitration will be available for tenants who are considered ‘financially viable businesses’ and tenants that were ‘mandated’ to close, in full or in part, due to COVID-19 regulations. The new process will not apply to tenants who have entered into a CVA in respect of COVID arrears nor to tenants who have entered into statutory restructuring plans, schemes of arrangement or voluntary rent settlements.
The process begins with a compulsory pre-application stage. The landlord or tenant must notify the other party of their intention to pursue binding arbitration, together with a proposal for settlement of the rent arrears. The other party may respond within 14 days either to accept the proposal made or submit their own counterproposal. All proposals must be supported with financial evidence of “viability” and affordability and otherwise in line with the behaviours and principles set out in the new Code.
A landlord or tenant may then make an application for arbitration together with a copy of the proposal and supporting evidence. The application must be made during a period of six months starting on the date the draft legislation will come into force. A fee will be payable at this stage with the amount payable set by approved arbitration bodies. The fees are expected to be relative to the size of the debt.
The other party will then have 14 days to submit their own proposal together with supporting evidence. At this stage there is also an opportunity for either the landlord or tenant to submit revised proposals in respect of what the arbitrator’s award should be.
Both parties will be given the choice of a public (oral) hearing, or alternatively, the arbitrator will consider the matter based on the documentation provided. If a hearing is requested, the arbitrator will seek to conduct the hearing within 14 days from the receipt of a request for one. The hearing should not last more than six hours.
The arbitrator will consider their decision based on the written evidence and any hearing. The arbitrator will have the ability to defer or write off arrears, however they must assess the proposals against the principle that rent debt accrued as a result of COVID-19 should not force an otherwise financially viable business to close. Parties will be notified within 14 days of a hearing of the award made which will be legally binding. The arbitrator will also have the power to apportion the costs of the process between the landlord and tenant.
The new Code and Bill make the clear that the starting point is that the tenants are expected to meet their contractual obligations in full. Where a tenant would be viable but for the ringfenced arrears the arbitrator may impose a reduction of up to 100% and/or provide payment by instalments usually of no longer than 24 months.
Arbitrators must have regard to the viability of the tenant, its assets and liabilities including other tenancies, previous rental payments made, the impact of Coronavirus on the tenant’s trade and any other information relevant to the tenant’s financial position. Balanced against these the arbitrator must have regard to the solvency of the landlord, it’s assets and liabilities including other tenancies and any other information relevant to the landlord’s financial position.
Any manipulation by the tenant or landlord as to “viability” or “solvency” must be ignored. Similarly, the arbitrator is directed to ignore the possibility of any refinancing or restructuring of the tenant or landlord.
The introduction of a new arbitration process may come as a sigh of relief to tenants following the series of judgments that have ruled in favour of landlords with respect to COVID rental arrears. However, the new Code emphasises that arbitration is intended to be the last resort and parties are encouraged to negotiate in order to avoid an arbitration, with the expectation that the landlord waives some or all rent arrears where possible.
It remains to be seen whether a new arbitration process would prove to be successful in resolving COVID arrears disputes, and we will stay alive to any further developments.
We will comment in Part 3 – “Mission Impossible” upon the issues and unanswered questions that we see arising from the new Code and Bill.