Time to pay up? Moratorium ends on commercial rent arrears

The Commercial Rent (Coronavirus) Act

The long-awaited Commercial Rent (Coronavirus) Bill has now received Royal Assent and become the Commercial Rent (Coronavirus) Act (the Act). 

Many of the main provisions outlined in our previous updates on this legislation remain largely unamended in the final Act, but new provisions have been added which:

• confirm the arbitrator's award will alter the terms of the lease relating to protected rent debt
• provide clarity on liability for the costs of the arbitration process. 

Guidance for Arbitrators

In anticipation of the Bill being passed as law, the government recently published a working draft of guidance aimed at assisting arbitrators with the operation of the new scheme (the Guidance). This Guidance is only intended to be a draft at this stage, with the final version being published in due course. However, it provides helpful insight for landlords and tenants alike into how this novel process should be approached and, crucially, provides clarification on the interpretation of the previously allusive principles of "viability" to which arbitrators are to have regard under the provisions of the Act.

The Guidance conveniently simplifies the process into the following three stages:

• Stage 1: the pre-arbitration stage.
• Stage 2: the arbitrator's assessment of whether the dispute is eligible for arbitration under the Act.
• Stage 3: the arbitrator's assessment of the matter of relief from payment of a protected rent debt.

Stage 1

Stage 1 must be completed and the reference to arbitration made within six months after the Act is passed so by 23 September 2022. Our previous article, which can be found here, sets out the steps the parties are required to take before referring the matter to arbitration.

Once these steps have been satisfied, the party applying for arbitration should give notice in writing to one of the approved arbitration bodies requesting that the body appoint an arbitrator (or arbitrators). The Guidance confirms that the parties are free to decide how many arbitrators are appointed and whether a chairperson is required. Although generally, in the absence of agreement, a sole arbitrator will be appointed.

Stage 2

This stage is also known as the "Eligibility Stage", as it asks the arbitrator to broadly consider the following four issues in order to determine whether the dispute is eligible for an award under the Act:

• Whether the tenancy is a business tenancy (meaning a tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies).
• Whether the rent in question is "protected rent debt". For guidance on the meaning of "protected rent debt" for the purposes of the Act, please see our previous article here.
• Whether the parties have already reached an agreement regarding settlement of the protected rent debt.
• Whether the tenant should be given relief. This will require an assessment of the tenant's "viability". 

If the arbitrator is satisfied that the dispute does not fall inside the scope of the Act on any of the above grounds, the Guidance makes clear that they must make an award dismissing the reference at this stage.

Stage 3

Once the arbitrator is satisfied that the dispute is eligible for an award, they must decide whether the tenant should be given any relief from payment and, if so, what that relief should look like. The overarching focus of this stage is to determine the extent to which the tenant can pay the protected rent debt having regard to both the viability of the tenant's business and the solvency of the landlord.

The Guidance makes clear that the arbitrator does not have total discretion as the final award must be aligned with whichever of the formal proposals put forward by the parties best reflects the following principles:

• The need to preserve or restore the viability of the tenant’s business so far as that is consistent with preserving the solvency of the landlord.
• The requirement for the Tenant to meet its obligations to pay the protected rent debt in full and without delay (in so far as this is consistent with the above). 

It is only where the arbitrator believes that neither proposal is consistent with these principles that they must make whatever award they consider appropriate.

What is "viability"?

As mentioned above, the arbitrator is required to consider the concept of the tenant's "viability" at both Stage two and Stage three of the process - but what does "viability" actually mean for these purposes?

The Guidance deliberately doesn't define "viability" on the basis that a variety of different business models may apply and these will differ significantly depending on the tenant's sector. The key point to consider is whether putting the protected rent debt aside, the tenant has, or will have in the foreseeable future, the means and ability to meet its obligations and continue trading.

To make a judgment on viability, the arbitrator will rely on the evidence provided by both parties with their formal proposals. The Guidance confirms that the arbitrators can request any missing information they think may be helpful to consider when making their determination and provides some helpful suggestions to assist arbitrators in their assessment of the evidence provided by the parties. For example, the Guidance notes that bank account information may be a useful indicator of whether a tenant's business is viable as will information showing the net profit margin before March 2020 compared to the end of the protected period. It also highlights that some smaller businesses may find it more challenging to provide predictions on their future profitability and some businesses may return to pre-COVID levels of profitability quicker than others.

One point from the Guidance is clear; parties will need to provide as much evidence as possible to support their proposal in order to secure a favourable outcome from the arbitration. This is particularly true of tenants as it is the tenant's responsibility to evidence the viability of their business to the arbitrator, although landlords may also submit evidence to support any contrary arguments. Both sides are therefore advised to begin collating the necessary information at an early stage so that they are adequately prepared for the process.

FAQs

When will the award be made?

If there is no hearing, the arbitrator must make the award as soon as reasonably practicable after the day on which the latest final proposal is received or, if only one proposal is received, the last day on which a party could have put forward a revised formal proposal.

Will the award be confidential?

The award must be published by the arbitrator along with their reasons for making that award, but any confidential information relating to a party must be excluded, unless the relevant party consents to its publication. For these purposes, confidential information means information which, if disclosed, would or could significantly harm the legitimate business interests of the party or person to whom the information relates.

Parties are therefore advised to carefully consider any sensitive information which they wish to disclose as part of the arbitration.

How can the award be enforced?

Provided that the enforcing party has the permission of the court, the award may be enforced in the same manner as a judgment or order of the court.

How will the costs of the arbitration be dealt with?

The party who makes the referral to arbitration must initially pay the arbitrator's fees before the arbitration takes place. The general rule is that the arbitrator must also make an award requiring the other party to reimburse the applicant for half the arbitration fees and, if applicable, half the hearing fees. In all other respects, the default position is that each party meets its own cost in connection with the arbitration.  Arbitrators can depart from this general rule if they consider it appropriate in the circumstances. 

Can you appeal the award?

Either party can appeal or challenge an award made under the Act within 28 days on either jurisdictional or irregularity grounds. Similarly, either party can appeal to the court on a question of law arising from the award.

Next steps

If you wish to discuss your strategy under the new arbitration scheme, please get in touch with a member of our team to ensure that you are best prepared. For those landlords wanting a greater understanding of the possible remedies following the lifting of the moratorium on forfeiture for rent arrears, including forfeiture and the Commercial Rent Arrears Recovery scheme, please see our article here which provides an overview of the options available.