Commercial Rent (Coronavirus) Bill

The Government has published draft legislation for England and Wales, with the aim of tackling accrued rent arrears for businesses which were forced to close during the pandemic. The Commercial Rent (Coronavirus) Bill provides for the ringfencing of rent debt built up by businesses forced to close during the pandemic and establishes a binding arbitration system to determine what happens to that ringfenced debt. Alongside the Bill, the Government has also published a revised Code of Practice to be used by landlords and tenants to resolve disputes over unpaid rent arrears, which replaces the previous version from June 2020.

What is the Code of Practice?

The Code of Practice has a wider application than the new Bill. It should be used in relation to any rent arrears accrued since March 2020 as a result of the pandemic, and sets out best practice guidance to assist landlords and tenants in resolving disputes relating to such arrears. The intention is that the parties may be able to resolve these disputes before the Bill comes into force. The Code is guidance only, not binding legislation.

What is the new Bill and why has it been introduced?

By contrast, the new Bill applies to “ringfenced” rent arrears only. Broadly, this means those arrears which accrued because tenants were mandated to close their premises or cease trading during the specified period (see below for more detail). The Bill will provide a new legal process for those landlords and tenants who have been unable to reach agreement in relation to ringfenced rent arrears, by enabling them to refer their claim to binding arbitration. The Government hopes to have the Bill passed by 25 March 2022.

The Bill also introduces some temporary measures to enable and support use of the arbitration process (but only in relation to the ringfenced debt):

• a moratorium on the use of certain remedies and measures whilst the application period for arbitration is open or arbitration under the legislation is in progress; and
• where debt claims in the County Court or High Court have been initiated after 10 November 2021, they will be stayed if one of the parties applies for it and the claims are not concluded.

For a more detailed summary of the temporary measures and restrictions introduced, please see our more detailed version of this note.

Who is eligible to use the arbitration scheme and what falls within the scope of the Bill?

The Bill presently applies to tenants who, during the ringfenced period (1) were mandated to close their premises (in whole or in part) or cease trading under coronavirus regulations; (2) occupied the premises under a business tenancy; and (3) have rent arrears relating to that period. Taking these elements in turn:

• Ringfenced period: means from 21 March 2020 to the last date that restrictions were removed for the tenant's business. A summary of the ringfenced periods and a broad overview of the businesses affected by the Bill is included at Annex A to the Code. For example, a clothing shop in England would have a ringfenced period of 21 March 2020 to 12 April 2021 (when non-essential retail was allowed to re-open); whereas for a café in England, the ring-fenced period would be from 21 March 2020 to 18 July 2021. It would appear that any periods during the pandemic when tenants were permitted to re-open before being required to close again as restrictions were re-introduced will be treated as part of the overarching protected period.
• Mandated to close their premises or cease trading: means where the whole or a part of the tenant's business or premises was required by Coronavirus regulations to be closed for the ringfenced period.
• Business tenancy: is defined as a tenancy to which Part II of the Landlord and Tenant Act 1954 applies (the Coronavirus Act 2020 uses a similar definition), and with some possible exceptions, will broadly apply to leases and underleases (where the premises is occupied by the tenant for business purposes). It is expected that “contracted out” leases will be considered to be business tenancies because Part II of the 1954 Act applies to these tenancies (it is only sections 24 to 28 of the 1954 Act that are excluded by the contracting out process) but licences to occupy will fall outside the definition. Note that tenancies which were in place for some or all of the ring-fenced period but which have since ended will also be within the scope of the Bill, provided they meet the other criteria for inclusion.
• Rent arrears: this includes not just rent, but also service charges and insurance, as well as interest and VAT. Only those rent arrears which specifically relate to the defined ringfenced period are capable of being referred to arbitration. Additional arrears under the same lease would not be caught by the new Bill.

It is worth noting that the following are likely to be out of the scope of the Bill.

• Whilst not explicitly stated, it appears that pure office based businesses (for example, those tenants in the business services sector) will not benefit from the Bill, with guidance to “work from home” not (by itself) satisfying the eligibility criteria for the arbitration scheme – in scope tenants must have been legally mandated to close their premises or cease trading.
• Under the terms of the Bill, arrears that would ordinarily be “in scope”, will be out of scope if the parties have already come to an agreement on those arrears. We would expect to see further guidance from the Government on what constitutes an agreement on arrears, and whether those arrears would come back into scope if such an agreement was terminated or breached.

What happens to rent arrears or tenancies which are not within the scope of the Bill and are existing forfeiture and recovery restrictions impacted?

The Government’s impact assessment report suggests that only 30% of businesses are “in scope” for the purposes of the Bill, meaning that a significant number of businesses which have been impacted by the pandemic will not be able to use the arbitration scheme to resolve continuing rent disputes. For these businesses, landlords and tenants are encouraged to use the principles set out in the Code to negotiate and come to an agreement on outstanding rent arrears that protect the viability of both businesses.

Any rent debts owed by an eligible tenant which fall outside the scope of the Bill (for example because they do not relate to the ringfenced period) remain payable in full. However, it is worth noting that the current restrictions on forfeiture and Commercial Rent Arrears Recovery remain in place until 25 March 2022, and the restrictions on winding up petitions remain in place until 31 March 2022. For more information on the current restrictions, and how the Bill affects them, see our note on existing temporary measures as well as our more detailed version of this note.

How does the arbitration scheme actually work in practice?

Either a landlord or tenant can refer a dispute to arbitration within six months of the Bill coming into effect (expected to be 25 March 2022). The application would be made, together with supporting evidence and the relevant fee, to a Government approved arbitrator. Once a party has made an application, it would be sensible for the other party to engage constructively and make its own proposals in accordance with the two key principles set out below – otherwise, there is a risk that the applicant's proposal may be automatically imposed.

On what basis will the arbitrator make its decision and what decisions can it impose?

The arbitrator has a very wide discretion as to how to determine disputes, including whether to dismiss the referral altogether if it does not meet the strict criteria set out in the Bill. This creates significant uncertainty for landlords and tenants as to what the result of any arbitration process might be. However, the arbitrator must take into account the following two key principles in making its decision:

• any award should aim to preserve the viability of the tenant’s business (but not at the expense of the solvency of the landlord); and
• a tenant that is capable of paying the protected rent debt in full should do so without delay - any relief should be no greater than that which is necessary for the tenant to afford the payment.

The viability of the tenant is a key “gating requirement” for a tenant to be eligible for rent concessions. Critical to the arbitrator's decision will be the need to assess business viability: a tenant whose business would be viable but for rent payments is more likely to achieve an award whereas a tenant whose business is not viable is not entitled to an award. Such assessments are difficult to make and are subjectively dependent on financial disclosure. An assumption has been made that there are sufficient arbitrators with the necessary skillsets to determine disputes willing to work at Government capped fee rates. In any case, further guidance is promised as the Bill progresses through Parliament.

Relief from payment of ringfenced debts can take the form of either (1) writing off the whole or part of the debt; (2) allowing additional time to pay the debt or allowing the debt to be paid in instalments; and/or (3) reducing or cancelling interest owed on any debts. If the tenant is given additional time to pay the debt, the maximum delay for payment that can be awarded is 24 months from the date of the award.

What happens once a decision has been made?

Some cases may involve a hearing whilst others will be paper-based. The arbitrator should notify the parties of any award within 14 days of a hearing, or otherwise as soon as reasonably practicable.

Once a decision has been made, the arbitrator must publish its award together with its reasons for making it (but confidential or commercially sensitive information may be redacted). Whilst the award is binding on the parties, it will not act as “precedent” or authority to bind other arbitrators, so there is a possibility that arbitrators might act inconsistently, further adding to uncertainty for the parties. Grounds for appeal are limited and are further explored in our more detailed version of this note.

Final thoughts

The Bill is understandably a “work in progress” with its interpretation in certain areas open to debate pending further clarity. For parties looking to use the arbitration process, legal input is likely to be necessary and this will involve another layer of expense over and above the arbitration fees. The arbitration process is also likely to require considerable administrative and management time for both landlords and tenants, notwithstanding the Government's intention that the arbitration process will be “simple and streamlined”. It may be that a positive consequence of the introduction of the Bill is that it encourages landlords and tenants to engage proactively to avoid an uncertain decision and the cost and time cost consequences that will result from a referral to arbitration.