Authors

Saleem Fazal

Partner

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Edward Cooper

Senior counsel

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Stephen Burke

Senior associate

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Emma Archer

Associate

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Alicia Convery

Associate

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Authors

Saleem Fazal

Partner

Read More

Edward Cooper

Senior counsel

Read More

Stephen Burke

Senior associate

Read More

Emma Archer

Associate

Read More

Alicia Convery

Associate

Read More

11 November 2021

RED alert - Winter 2021 – 8 of 8 Insights

COVID-19: Update on recovery of commercial rent arrears

New legislation

The Government has published the draft Commercial Rent (Coronavirus) Bill (the Bill) which provides some long awaited detail on its new binding arbitration scheme.  While this may be altered by Parliament, we've set out the most important points from the draft below:

What arrears are covered by the Bill?

The Bill is widely drafted to include rent, service charge, insurance rent, VAT and interest which fell due during a period when a tenant was adversely affected by coronavirus. This is referred to as a "Protected Rent Debt".

How is it decided whether a tenant was adversely affected by coronavirus?

  • A tenant satisfies this requirement if it has a business tenancy and was mandated to close its premises or cease trading (in whole or in part) under regulations during the COVID-19 pandemic, during the "relevant period".
  • The relevant period is 21 March 2020 to 18 July 2021 (or 7 August 2021 in Wales).This correlates with the dates when restrictions were introduced and lifted in England and Wales respectively and will vary by sector.
  • For illustration, hospitality and nightclubs in England are described as falling within this category from 21 March 2020 to 18 July 2021, whereas non-essential retail in England do so from 21 March 2020 to 12 April 2021.
  • Importantly, certain sectors such as offices and pharmacies appear to fall outside the scope of the Bill.

When will arbitration be available?

It is intended that the arbitration scheme will be enacted and take effect by 25 March 2022 ie when it is anticipated that the Bill will be passed as an Act and come into force.

What about rent deposits?

  • The Bill treats deductions from rent deposits by landlords as Protected Rent Debts that may be considered by an arbitrator. This will be concerning for landlords who have drawn down on rent deposits but not agreed any express concessions with tenants, as these arrangements risk being overhauled.
  • Landlords are prohibited from deducting any arrears comprising a Protected Rent Debt from a rent deposit between the date the Bill is passed as an Act and the conclusion of any arbitration (or the expiry of the time limit within which it can be invoked).
  • If landlords have already deducted arrears comprising a Protected Rent Debt from a rent deposit, tenants are not required to top up the deposit until the conclusion of arbitration or expiry of the time limit within which it can be invoked.

What about commercial rent claims brought by landlords at Court?

  • No new claims can be commenced from the date the Bill is passed as an Act.
  • Any debt claims made between 10 November 2021 and the date the Bill is passed as an Act can be stayed on application of either party.
  • The Bill does not place any restrictions on claims which were commenced before 10 November 2021 and before the date the Bill is passed as an Act. Whilst landlords are prohibited from presenting a winding-up or bankruptcy petition in respect of Prohibited Rent Debt, this restriction only applies between the date the Bill is passed as an Act and the conclusion of arbitration or expiry of the time limit within which it can be invoked. Although the Bill appears to omit reference to circumstances where a landlord is seeking to enforce a claim for Prohibited Rent Debt prior to the date the Bill is passed as an Act, existing restrictions are in place to protect against winding-up petitions.
  • The position on the enforcement of judgement debts obtained prior to 10 November 2021 through other means is uncertain with the current drafting.

What must an arbitrator consider?

  • An arbitrator must consider whether a tenant's business is viable or would become viable if certain relief was granted from Prohibited Rent Debt.
  • This must be balanced against the preservation of the landlord's solvency.
  • Whilst an arbitrator has the power to make whatever award they consider appropriate, the award must require the tenant to make any payments (including instalments) no later than 2 years from the date of the award.

What is the arbitration process?

  • Arbitration must be invoked within 6 months from the date when the Bill is passed as an Act.
  • A landlord or tenant can serve a letter of notification within 6 months from the date when the Bill is passed as an Act. This notification must include a proposal which is supported by evidence.
  • The responding party has 14 days to respond with a counter-proposal which is supported by evidence.
  • The initiator has a further 14 days to consider the counter-proposal. After those 14 days (or 28 days if no response is received), either party can apply for arbitration.
  • An arbitrator can make an award on the papers or following a hearing.

New code

The Government has also published an updated Code of Practice to refer to the binding arbitration scheme laid out in the Bill.  It also includes information relating to what restrictions were in place at what time, what evidence a landlord or tenant should provide when negotiating and/or in arbitration and an overview of the arbitration process.

The Code goes into further detail about the principles of viability and affordability which an arbitrator must adhere to when making an award.  We will provide our views on these principles separately.

Our view

Whilst long-awaited detail is welcomed, the outcome is that the final remedy available to landlords (issuing a debt claim) has been removed.  This will be welcome news to tenants who are involved in or at threat of such proceedings but frustrating for landlords who, in the absence of negotiating an agreement, may need to wait until after 25 March 2022 to arbitrate (depending on when the scheme takes effect). Landlords are also prevented from using the Commercial Rent Arrears Recovery procedure between the date the Bill is passed as an Act and the conclusion of arbitration or expiry of the time limit within which it can be invoked.

There will also be arrears which are not captured within the scope of the Bill. For example, premises such as offices or airports which were impacted by coronavirus are unlikely to be protected.

If you wish to discuss your strategy in anticipation of the passing of the Bill, don't hesitate to get in touch with a member of our team to ensure that you are best prepared for when the new scheme comes into force.

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