Commercial rent arrears recovery

Below are two frequently asked questions from clients who have suffered the impact of commercial rent arrears recovery as a result of the mandatory closure of certain business premises (fully or partially), due to the COVID-19 regulations set during the pandemic.

Landlord : Are those arrears unrecoverable?

Tenant : How much protection do you have from a landlord pursuing your rent arrears?

The Government ring fenced arrears of rent that fell due between the period 21 March 2020 and 18 July 2021 and which related to a period when Coronavirus restrictions were impacting trading in the tenant’s particular sector (for premises in England). Landlords may mistakenly believe that these “protected rent debts” cannot be recovered. Equally, a tenant may believe that the arrears they owe to the landlord could mean irreparable damage to their business now that landlords are generally able to again exercise remedies such as forfeiture and instructing bailiffs to seize goods (CRAR).

Not so, from 24 March 2022 the Commercial Rent (Coronavirus) Act 2022 (the “2022 Act”) set out a legally binding arbitration process to be available for eligible commercial landlords and tenants who have not reached agreement resolving disputes about pandemic-related rent debt. The Government hopes that before September 2022 parties will have applied for and hopefully concluded an arbitration process that will resolve payment of rent debts that are “protected”.

Arbitration Process for commercial rent arrears recovery

1(a) Pre-arbitration correspondence (mandatory to encourage parties to settle early on)
1(b) Reference to arbitration – to Approved Arbitration Body
2(a) Assessment/determination of eligibility
2(b) Assessment of viability
3 Determination of relief from payment

What can be decided in Arbitration proceedings?

Rents, insurance rents, service charges and interest can all be included in the amounts which can be referred to the arbitration scheme.

It is for the arbitrator to determine with his/her own jurisdiction as to whether the debt is a protected rent debt or not. The parties can apply to Court to have the nature of the debt assessed if necessary.

Qualifying criteria

The 2022 Act and the arbitration scheme that extends from it applies to any business tenancy to which Part II of the Landlord and Tenant Act 1954 applies. There are therefore various tenancies which do not apply e.g. a farm business tenancy. Furthermore, it should be noted that for the dispute to be referred to arbitration the tenant should be in occupation of the subject premises. The 2022 Act is about protecting the business being carried on in the leased premises and so logically if the tenant has already vacated the business does not require such protection and the tenant will not be eligible to use this scheme.

Other parties?

Is the arbitrator able to take into account other interested parties in a dispute i.e. guarantors or other parties sharing occupation of the subject premises or parent companies? Given the other parties will firstly, not be in occupation and therefore not satisfy the eligibility criteria, and secondly, the arbitrator is to disregard any prospective loans or restructuring a tenant may have available, we suggest that generally the arbitrator would be unable to look at the parent company or guarantor or any other third party to which this may relate in this dispute.

Multiple occupation

Can multiple arbitrations relating to one tenant be consolidated? Firstly, a landlord would need to consent to this and we query how likely the landlord would want to give consent, as they may lose control of the arbitration. Furthermore, various other factors that would affect the outcome of other arbitrations may not apply to their own particular set of facts. Even though the power to consolidate does exist in the 2022 Act, the practicalities of differing landlords perhaps being assigned differing arbitration bodies and therefore different arbitrators comprised with the differing sets of facts and premises, means that in practice it is very unlikely that arbitrators will be able to consolidate their issues with their tenant in multiple arbitrations. That said, however, the Guidance does emphasise that an arbitrator must have regard for other tenancies which are subject to other arbitrations relating to the tenant.

Costs

Is the arbitrator able to award costs? No – Section 19 of the 2022 Act deals with fees and expenses and states that the parties must meet their own costs. Section 19 therefore overrides the Arbitration Act 1996. The knock-on effect of this relates to rendering without prejudice offers/Calderbank Offers as only being of use in relation to the arbitrator’s fees and the hearing fee itself.

The 2022 Act came into force on 24 March 2022, 2 months on we are seeing the following points arise:

Experience of the Arbitrator?

The 2022 Act says that the arbitrator must be experienced but does not specify in what area. The published Guidance states that the arbitrator needs to have sufficient oversight in the area on which they are being asked to arbitrate and that the arbitrator’s governing body must check this if required. Comfort can be given to the parties because the arbitrator has the ability to call an expert or legal assessor to assist, but this is hampered by the ability of a party who is able to block the appointment of such an expert or legal assessor. This leaves a question mark as to how the governing body regulates the arbitrator’s experience and how any hurdles that relates to that experience can be overcome.

Viability

The Guidance states that there needs to be a viability assessment on both the tenant and landlord when adopting the arbitration process. The Guidance that accompanies the 2022 Act further states that the assessment of viability (Para 6.10) should be “holistic and made with common sense”. Viability is examined at the date of the assessment if pre Covid material is of limited use.

Public or Private Hearing?

There is a conflict between the Guidance and Section 20 of the 2022 Act, which means it is not clear whether the hearing should take place in public or private which is unhelpful for parties concerned about confidential information if the hearing is to take place publicly.

Relief

The relief is dependent on the Proposals found in Section 14(11) of the 2022 Act and has been likened to a form of pendulum arbitration, because as long as the proposals made out by either party to resolve the arbitration are consistent with the “Arbitrator’s Principles” in Section 15, then an award may be made. The arbitrator is only free to make his own award where both (or the only proposals) are not consistent with those principles (see Guidance para 7.11).

Summary

The 2022 Act is intended to provide the mechanics to those parties seeking to resolve payment of protected rent debts. In reality, 2 months on from the enactment of the legislation we are seeing few parties using this arbitration scheme which may be due to the teething problems we mention above. If you are a landlord that was willing to write off any protected rent debts, maybe using the arbitration scheme should be a priority given there are 4 months left to run? If you are a tenant, the arbitration scheme should offer you the chance to formulate a plan that you can adhere to, to pay back the arrears without damaging your business irreparably.

If you have any concerns regarding commercial rent arrears recovery, whether you are a landlord or a tenant, please contact a member of the team.