Commercial Rent Arrears - Ring-fencing and Arbitration Announced

Following a long period of silence, the Government has now published its draft Commercial Rent (Coronavirus) Bill and an accompanying Code of Practice. The Bill and Code set out a comprehensive scheme to 'ring fence' certain COVID debts, and to provide for a short period for arbitration to resolve outstanding disputes between landlords and tenants.

Which COVID Debts Are Covered?

For a debt to be a "Protected Rent Debt" under the Bill it must be:

• a rent or service charge (whether or not described as such), or interest due on rent or service charge
• payable by a tenant of a business tenancy as defined by Part II of the Landlord and Tenant Act 1954
• relating to a period of occupation by the tenant between 21 March 2020 and the last day on which the tenant was subject to COVID closure requirements or restrictions on business

Whether or not a debt is a Protected Rent Debt will therefore depend on the restrictions which apply to a tenant's specific circumstances and sector, and when those restrictions were lifted.

How Does the Arbitration Process Work?

The Government has said that it intends to bring the Bill into law by 25 March 2022. Once the Bill becomes law, landlords and tenants will have six months within which to refer any Protected Rent Debt disputes to arbitration.

The Bill sets out a process for the parties to exchange information and to make submissions to the arbitrator. Either party can request an oral hearing if they wish.

The arbitrator will consider the viability of the tenant's business and the solvency of the landlord. The arbitrator must disregard either party's ability to borrow money or restructure its business, and any attempt by either party to deliberately arrange their affairs with a view to manipulating the viability test.

Following the Viability Test

• If the tenant's business is not viable and would not be viable even if it was given some relief, the arbitrator will dismiss the application and the landlord may take steps to recover the sums owed.
• If the tenant's business is viable or would become viable if relief is granted, the arbitrator must consider whether the tenant should receive any relief. The arbitrator may write off some or all of the debt, allow the tenant up to 24 months to repay the debt, and/or reduce or write off any interest on the debt.
• If the tenant's business is viable and would be viable even if no relief is granted, the arbitrator may be expected to refuse relief. This is because the government has continued to restate that tenants who are able to pay their debts should do so.

If neither party refers the debt to arbitration in the six month window, or the arbitrator dismisses the reference, the landlord is free to pursue other remedies to recover the sums owed.

What Other Remedies Are Affected?

Other tenant protections are due to expire in March 2022. The draft Bill proposes to extend those protections for Protected Rent Debts, and to introduce new protections for Protected Rent Debts, throughout the six month referral window or until any arbitration is concluded (known as the 'Moratorium Period').

These include:

• Debt claims: Landlords have previously been able to bring debt claims to enforce COVID-related rent arrears. Under the Bill, where a landlord would otherwise be able to bring a debt claim for a Protected Rent Debt:
  • If a landlord brings a debt claim between 10 November 2021 and enactment of the Bill and that claim is still ongoing, once the Bill is passed, either party can require the court to stay the claim so that the matter can be referred to arbitration.
  • If a landlord brings a debt claim between 10 November 2021 and enactment of the Bill and the landlord has obtained judgment, once the Bill is passed, the landlord cannot enforce the judgment and either party can refer the judgment debt to arbitration as if it were an outstanding Protected Rent Debt.
  • Once the Bill is passed, a landlord may not bring a new debt claim in respect of a Protected Rent Debt until the end of the Moratorium Period.
• Guarantors: The Bill grants guarantors the same protections against debt claims as it does tenants, effectively preventing a landlord from collecting from a guarantor.
• Forfeiture: A landlord cannot exercise a right of forfeiture in respect of a Protected Rent Debt during the Moratorium Period.
• CRAR: A landlord cannot use Commercial Rent Arrears Recovery (formerly known as distress) in respect of a Protected Rent Debt during the Moratorium Period.
• Lease renewals: For the purposes of an opposed business lease renewal, the landlord may not rely on the tenant's failure to pay the Protected Rent Debt as evidence of a persistent delay in paying rent.
• Appropriations: Where a landlord has a choice to allocate sums received from a tenant, the landlord must allocate sums toward non-protected debts before applying them against Protected Rent Debts. This is to prevent a landlord from allocating sums so as to remove the tenant's protections.
• Rent deposits: Where a tenant has given a rent deposit:
  • if the landlord draws down on the deposit before the Bill is enacted, the landlord cannot require the tenant to top up the deposit until the end of the Moratorium Period
  • once the Bill has passed, the landlord may not recover any part of the Protected Rent Debt from the deposit during the Moratorium Period
• Insolvency: Insolvency procedures are extended in respect of Protected Rent Debts, during the Moratorium Period.

Comment

The draft Bill gives little comfort to landlords who will face further delays and further restrictions on the recovery of COVID arrears debts. In particular, the Bill will retrospectively remove a landlord's ability to bring or enforce a debt claim against a tenant or guarantor or to usefully draw down on a rent deposit, potentially stymying a landlord's remedies until late 2022.

On the other hand, both landlords and tenants will welcome the certainty that the new Bill provides. Although the Bill may change as it passes through Parliament, the Government's detailed proposals will give parties long-awaited clarity and encourage settlement of outstanding disputes.

If you are a landlord or a tenant and would like further advice on commercial rent arrear debts, please contact Philip Sheppard in our Property Litigation team on 0117 314 5621 or complete the form below.