What will the Covid rental arrears arbitration scheme mean for commercial property tenants?

Those operating in the commercial letting sector took many knocks when the COVID-19 pandemic took hold of the UK. Where both retail and hospitality are concerned specifically, the mandated closures and restrictive measures imposed had an enormous impact, with the government itself reckoning that there was somewhere in the region of £9 billion in rental arrears still outstanding at the end of March 2022.s

In an attempt to try and both protect tenants from the very realistic threat of total collapse whilst also ensuring the financial viability of many commercial landlords, the Government introduced a range of legislation. But when 24 March came around this year, the Commercial Rent (Coronavirus) Act 2022 came into force, and many of those temporary restrictive measures were revoked, changing the commercial landscape once again.

The Act bought with it the launch of an arbitration scheme designed to assist those involved in commercial property more efficiently manage any rental debts accrued during lockdown. But how does this arbitration scheme work, and what will its establishment mean for those tenants who continue to struggle with the debt caused by COVID-19 complications? Here, Alex Pelopidas of Newmanor Law discusses.

What were the restrictions introduced in 2020?

The routes for managing the collection of outstanding rental arrears were restricted temporarily for commercial landlords when the UK headed into its first lockdown in March 2020. 

The right to forfeit a commercial lease on the grounds of non-payment of rent was placed under a suspension for example, as was the use of Commercial Rent Arrears Recovery (CRAR).

The use of statutory demands whilst pursuing up unpaid debt bought about by COVID-19 was also halted, removing the landlord’s ability to chase tenants failing to pay with a petition to have their business interests wound up. 

A Code of Practice first published by the Government in June 2020 proposed several practical measures that landlords could try as an alternative:

  • A full or partial rent-free period;
  • Reduce ongoing payments to a current market rate;
  • A deferral of the whole or part of the rent for one or more payment periods;
  • The payment of the rents over shorter payment periods for a set time (e.g. monthly rather than quarterly);
  • Landlords drawing from rent deposits on the understanding that they will not then be able to request that these deposits be “topped-up” by the tenant before absolutely reasonable to do so.

Although the notion of achieving a compromise on the matter may have seemed tempting to both parties initially, many landlords will have simply opted to wait for the period covered by the original Coronavirus Act to end instead so that they could take action to fully recover any monies they deemed to be commercially imperative.

However, under the new legislation announced, any landlord hoping to recoup arrears accumulated during the ‘protected period’ of between 21 March 2020 to 18 July 2021, will have to acknowledge that arbitration will be the only option if a compromise cannot be reached.

When does the Commercial Rental (Coronavirus) Act 2022 apply? 

The processes outlined in the Commercial Rental (Coronavirus) Act apply only to tenants who are under a business tenancy, and who were, at any point during the pandemic, legally mandated to cease trading from their premises, either in whole or in part. It encompasses not only rental debts but also service charges, insurance rent, interest due and any VAT charged during the protected period.

It becomes relevant only when parties on either side find themselves unable to reach a cordial agreement about how pandemic arrears should be managed. Each party retains the right to apply for arbitration at any point during the six months after the Act was passed. 

Both landlords and tenants will be expected to provide towards the costs of undertaking the arbitration process, provided they are believed to have negotiated in good faith. However, if either party is believed to have negotiated in an uncooperative manner that is at odds with the Act, then the arbitrators retain the power to award costs to the opposition.

What process will arbitration follow?

Private, impartial arbitrators, who will have previously undertaken a thorough approval process confirming their competency, will be responsible for the administration of the statutory dispute resolution process.

To proceed, the body making the application must first formally notify the opposing body that they intend to pursue binding arbitration. In this, they must propose a potential settlement, to which the other side must respond within 14 days. The recipient must then decide whether they either accept the proposal, submit a counterproposal, or proceed with arbitration.

Any proposal submitted will need to be fully costed-up and well-reasoned, supplying financial evidence that will demonstrate that it represents a viable and affordable solution to the matter. After which point, either side can make an application for arbitration, using all the evidence available. 

The arbitrator will have the power to adjourn, implement an instalment payment plan, or write off debts entirely, enforcing a reduction in arrears of anything up to 100%, working on the theory that the business would still be financially viable if it wasn’t for the pandemic. 

Tenants are still expected to meet their contractual obligations wherever possible, however. The arbitrator will only decide to wipe out ring-fenced arrears where it is expressly proven that this is the only sizable obstacle to the tenant’s ongoing viability. 

Arbitrators will take many factors into consideration when making a ruling, such as the total assets or liabilities of the tenant, any other tenancies they may have, along with the track record the tenant had for prompt payment before the pandemic. 

How will the arbitration scheme help to resolve disputes over rental arrears?

The Government has specified that the arbitration process is only to be used as a backstop, with negotiations between the tenant and landlord continuing to be the priority. This message has statutory backing as the Act states that both parties should be seen to engage in further negotiations outside of the arbitration process and that any agreement reached in this way will be enforceable regardless of the arbitration process. 

In the future, tenants will need to remain conscious of the fabricated situation that was created by the pandemic and the accompanying legislation taken out to manage it. This scenario has now ended, and landlords are able to pursue any unpaid rent from outside the protected period using all of the tactics that have historically always been available to them. 

However, if a proportion of arrears being chased does stem from a protected period it could make things complicated for the landlord. The tenant may be able to stay the action and a court could well order that the landlord needs to pay any costs to date (in the case of debt proceedings), or the landlord might be held liable for the costs of pursuing an unlawful claim (in the case of forfeiture).  

It’s vital that each side in this debate is seen to be behaving ‘reasonably’ through this whole process. If the arbitrator feels that a tenant is in any way being excessive with their expectations, such as asking for an inexcusable reduction or write-off, then the arbitrator might find themselves questioning the long-term sustainability of the business. And because this is the whole purpose for which arbitration was conceived, that could be damaging for everyone concerned.

Karen Mason is a highly experienced property lawyer and co-founder of Newmanor. She has worked for a variety of commercial clients investing and dealing with property, including landlords and tenants in a variety of sectors.

Alex Pelopidas is a finance specialist with over ten years of experience in real estate finance transactions. He has a broad practice involving loan origination, restructuring, and enforcement working with a variety of lenders, borrowers, investors and property professionals.

Newmanor Law is a specialist real estate law firm, combining fresh technology with legal insight, working with property professionals on acquisitions and sales, construction matters, development, property disputes, landlord and tenant matters, along with debt finance and tax matters relating to property.

Photo by Tony Hisgett on Flickr CC BY 2.0.