On 9 November 2021 the Government introduced the Commercial Rent (Coronavirus) Bill ("the Bill") and the Code of Practice( which replaces the Code published June 2020). The Bill and Code provide guidance to landlords and tenants in relation to pandemic rent debts, the proposed arbitration scheme and on enforcement of "protected debts". Whilst the Bill is not intended to be enacted until March 2022, the Bill does provide relief from enforcement of protected debts from 10 November 2021.
The Bill will come as a welcome relief to tenants who now have clarity that landlords cannot issue debt proceedings in relation to arrears accrued during mandated closure periods. Guidance has also been provided in relation to the proposed legally binding arbitration scheme.
What's covered under the Bill?
Protected debts are covered by the Bill. A protected debt is one which arises out of a business tenancy and includes rent, service charges, insurance rent and interest. Protected debts cover periods when a business was required to close due to Government restrictions. This is known as the relevant period.
The relevant period is 21 March 2020 to 18 July 2021 (or 7 August 2021 in Wales) or if earlier the last day on which the Tenant's business or the let premises was subject to a " closure requirement" or a " specific coronavirus restriction"( as defined in the Bill). It is important to check the precise dates that any business was required to close as these varied from sector to sector( but helpfully these are set out in the Appendix to the Bill).
The Bill makes clear that it does not provide protection in relation to periods when a tenant was able to trade, free from any Government closure requirements. For example, it would not cover offices even if staff were required to work from home.
How does the Code of Practice fit in?
The Code of practice focuses on the need for landlords and tenants to work together. It makes clear that if tenants can pay their rent, they should. If tenants cannot afford to pay their rents then they should work with the landlord to agree waivers or concessions.
The Code applies to all arrears regardless of mandatory closure periods.
The Code provides guidance on the arbitration process. The focus is on preservation and viability of a tenants business which must be balanced against landlord solvency.
The arbitration process
The Bill and Code provide guidance on the arbitration procedure.
Any request to refer a matter to arbitration must be made within six months of the day on which the Bill is passed by parliament.
The party triggering the process must serve notice on the other of the intention to refer the matter to arbitration. The request must be accompanied by a proposal which is supported by evidence of why the proposal should be accepted.
Within 14 days the responding party can accept the proposal, reject the proposal or make its own proposal. If the receiving party is a landlord it is not required to submit any evidence to support its position but the arbitrator will take this into account. There will be a further 14 days for the initiating party to consider the counter proposal. The proposals are very significant and must be considered against the principles detailed in the Code.
If the matter is not resolved the arbitrator will consider both proposals and any evidence submitted to decide what concession to make. This may be at a hearing and such hearing will be held in public unless the parties agree otherwise. All awards will be publicly available.
An arbitrator can dismiss a referral if the debt does not relate to a business tenancy, it does not relate to a protected debt or the arbitrator decides the business is not viable even if a concession were awarded.
What does the arbitrator take into account?
The focus is on preservation, restoration and viability of the business of the tenant whilst also preserving the landlord's solvency. Specific principles are set out against which the proposals are to be considered.
The Code makes clear that the parties should be transparent and share information in order to agree terms of concessions.
The arbitrators will be appointed by the Secretary of State from a body of arbitrators who are suitably qualified and experienced. Given the focus on tenant viability, affordability and preservation of business it is expected that the arbitrators will be selected from a pool of accountants.
Are there any limitations to the arbitration scheme?
The maximum concession period will be 24 months from the date of the award. If a party is seeking a concession for a longer period of time or a more creative agreement, it would be in the parties' best interests to agree terms now and before March 2022.
Once the award has been made, a tenant may not enter into a CVA for 12 months.
There is no guidance on whether the award of the arbitrator can be appealed but it is expected that this will be a very high threshold and any appeals process will be in line with the usual appeal rules relating to arbitrations.
The treatment of the arbitrators fees in not dealt with. My view is the arbitrator will determine who pays his/her fees.
Does the Bill introduce any interim measures to protect tenants from enforcement of protected debts?
Forfeiture and the use of statutory demands and winding up petitions will be restricted until 31 March 2022. The use of CRAR is restricted until 25 March 2021. These moratoriums are not limited to periods when premises were required to close.
From 10 November 2021 and enactment of the Bill, if a landlord applies to court to pursue a claim relating to a protected debt the tenant can apply to stay the proceedings to enable the claim to be dealt with by the arbitration process. If no stay is sought and a judgment obtained, the tenant or landlord can apply to the arbitration scheme and the judgment may be varied in accordance with any award made by the arbitrator.
It appears that there are no restrictions in relation to judgments obtained before 10 November 2021 regardless of whether it relates to a protected debt or not and the landlord can enforce the judgment in the usual way. However, if a landlord is seeking to wind up a tenant company it will have to satisfy the test that COVID has not had an impact on the ability to pay the judgment debt before proceedings to enforce any judgment. It therefore seems there is little to be gained by enforcement due to wider moratoriums.
Landlords do have other means to enforce judgments (charging orders/freezing bank accounts) and it will be interesting to see if further readings of the Bill will close this loophole.
What are the key takeaways?
The new legally binding arbitration process will come into effect in March 2022 and it will take account of protected debts only.
The focus is on balance and business viability.
Given the principles to be applied by the arbitrators we would strongly urge parties to engage in open conversations, share financial information about the tenant's financial position and make proposals which take into account the stated principles of the arbitration scheme.
Landlords cannot draw down from tenant rent deposits in relation to protected debts and where a landlord has drawn down, it is unable to demand a top up of the deposit. Arbitrators will take into account any draw down by the landlord.
Arbitrators are expected to be accountants given the focus on viability, preservation of business and affordability. Landlords and tenants should be expected to share financial information.
Landlords can issue court proceedings in relation to unprotected debts. A landlord can also enforce any judgment obtained before 10 November regardless of whether the judgment includes a protected debt although this gap may be closed in later readings of the Bill.
If a landlord issues court proceedings after 10 November 2021 and the proceedings relate to a protected debt, the tenant can apply for a stay of the proceedings which the court must order. The stay will remain in place until March 2022 at which point, the tenant may apply to have the matter resolved by the arbitration scheme.
Landlords are unable to forfeit leases or exercise CRAR (seizing goods to the value of the debt) in relation to all arrears and no distinction is made in respect of protected/unprotected debts. These protections will remain in place until March 2022.
When making payment of any arrears (whether relating to a protected debt or not) a tenant should be clear about the payment period to which the sums should be allocated. However, in the absence of any confirmation, the landlord must apply the payment to unprotected debts.
The arbitration scheme will not look behind existing rent concession agreements and parties should continue to pay under these agreements.
If the arbitration scheme and limitation of payment of the protected arrears within 24 months is not suitable for either party then they should try to use the window between now and enactment of the Bill to agree terms.
If you would like further advice on the Bill, code or COVID commercial rent matters then please contact Bhavini Patel (firstname.lastname@example.org).