The Government has recently published its response to the call for evidence in relation to Covid-19 arrears and a summary of the consultation responses. Full details can be found here:
In brief this will ringfence debt accrued from March 2020 for tenants who have been impacted by the closures the lockdown imposed and it will introduce a system of binding arbitration to be undertaken between landlords and tenants. This is to be used as a last resort after bilateral negotiations have been undertaken and only where landlords and tenants cannot otherwise resolve matters between themselves.
The response confirms that the "government is clear that those tenants who have not been affected by closures and who have the means to pay, should pay". There is an expectation that commercial tenants should be paying rent in accordance with their lease from the point of restrictions being lifted.
However, this government intervention into matters of contract is unchartered territory. The fact that the government is resorting to binding arbitration which will override contractual rights speaks perhaps to its unwillingness to allow the work it did by implementing the protectionist measures it brought in last year, through the furlough scheme and similar, to potentially now be undone. The recourse to binding arbitration may be driven by the fact it lowers the risk of insolvency and unemployment, the former of which is in neither landlord nor tenant's interest. Neither is it in the government's interest as it risks the political judgement of being accused of having effectively squandered furlough funds because the businesses which it intended to support eventually ended up with no premises to operate from.
The consultation analysis however reveals that the majority of landlords were against binding arbitration. While reasons given for this relate to time and cost, perhaps underlying all this is simply the fear of many landlords that they will not benefit from arbitration and the process will leave them having to waive some rent which contractually they are not obliged to do.
The consultation reveals stark difference in opinion. Figures 5 and 6 in the consultation paper highlight this most clearly in terms of the perceived best "next steps", with landlords overwhelmingly preferring that the current tenant protection measures expire, while tenants' preference was the route of binding arbitration. The relatively low number of large landlords who participated in this consultation might have meant more of a tenant bias in the government's ultimate decision on which route to take.
The second discrepancy of extraordinary note is the level of arrears each believes is owed: tenants claim to owe £571,107,558. The total rent landlords claim they are owed is £1,732,084,445. This is a difference of £1,160,976,887. This could of course be down to the nature of those responding: it is interesting to note that the consultation received just over 500 responses and the vast majority were small businesses. Big businesses appear to have engaged less in this process.
It is very difficult to read much into this response beyond the obvious landlord/tenant preference and there is detail still to be ironed out. Once legislation is passed, the moratorium on evictions will only apply to ringfenced arrears. There is plenty of narrative in the response about the ring fencing applying whilst restrictions remain in place for the relevant business, but it is not clear whether there is a sliding scale based on the level of restriction or whether it is more black and white and any tenants who were even partially open will not benefit from the ring-fencing. The government will need to clarify this so that there is no disagreement.
In contrast there is a statement within the response stating that "tenants should clearly state in writing to their landlord how payments they make are to be treated, specifying the period of time that the payment should be apportioned to, for avoidance of doubt" - a detail which adds little to the process. Landlords are not bound to apply funds to certain arrears and indeed many will use it to top up any rent deposit with the arrears remaining.
The response acknowledges that details of this process will be released in due course and there is mention of the parties each contributing to the costs of arbitration if they both act in good faith. Each party will arrive at the point of arbitration when they have been unable to agree and the subjective nature of "good faith" will be hotly debated. Arbitrations are generally private and confidential and so there is likely to be a range of professional arbitrators employing their own views in each case.
This response is not the final word on this matter and further guidance will need to be issued to support both parties through this new legislation. Matters will still ultimately be left to the parties to try and negotiate but will the outcome under these rules, whether through agreement or arbitration (with its associated time and costs) result in a fair resolution for both parties?