This note discusses what the new draft Commercial Rent (Coronavirus) Bill (‘the Bill’) and the Code of practice for commercial property relationships following the COVID-19 pandemic (‘the Code’) will mean for commercial tenants and landlords.

The Bill & Code were announced on 9 November 2021 and certain elements are already in effect, albeit the government anticipates the new arbitration process (provided for under the Bill) will not come into force until on or around 25 March 2022.

Are you a commercial landlord or tenant, or do you advise those parties? If yes - you need to familiarise yourself with the Bill & Code now by reading this note.

Summary

Here’s what landlords and tenants broadly need to know as of 11 November 2021:

1. The Bill is a powerful instrument, as it; empowers arbitrators to effectively rewrite pre-agreed leases and make awards altering judicial decisions; and can force judges to stay claims thereby overriding their wide case management powers. This is unprecedented.

2. The Bill & Code suggest that further guidance will be issued in due course, and, that the Bill maybe subject to change. So our understanding may alter over time.

3. Before the Bill is given assent:

3.1. Landlords can still issue a money claim, but once the Bill is passed, the tenant (and its guarantor) can apply to ‘stay’ (ie pause) that money claim if it relates to a debt to which the Bill applies. The same can be said in respect of a money judgment in respect of a debt to which the Bill applies.

3.2. The restrictions on the use of forfeiture, the Commercial Rent Arrears Recovery (CRAR) process and winding up/bankruptcy petitions remain in force.

4. From when the Bill is given assent and for a temporary period (which can be extended):

4.1. A new binding arbitration scheme will come into effect. If the scheme applies to a lease, it can determine whether and how certain rent arrears should be repaid. This could include writing off arrears (in whole or part) and/or paying them in instalments over a period of up to 24 months. Parties can apply to the scheme for six months but this period could be extended.

4.2. Landlords cannot issue money claims or enforce judgments in respect of protected debts.

4.3. The restrictions on forfeiture, CRAR and winding up/bankruptcy petitions will remain in force, but only in respect of protected debts.

4.4. Existing agreements made between landlords and tenants will remain in force and will not be affected by the Bill (assuming those agreements are legally enforceable), so tenants will not get a ‘second bite at the cherry’. Similarly, the Bill does not apply to rents already paid by a tenant; it only applies to unpaid rent. So, a tenant cannot use the Bill to ‘claw back’ previously paid rent.

Introduction

Background

The Bill and the Code follow:

1. The outcomes to the government’s Call for Evidence, launched in April 2021;

2. The challenging market conditions both during and ‘after’ the Covid-19 pandemic; and

3. A year and more of extra ordinary measures regulating and restricting the landlord and tenant relationship (such as the prohibition on forfeiture due to commercial rent arrears, which should expire on 25 March 2022).

The code

The Code replaces the previous Code of practice for commercial property relationships dated 19 June 2020 (and updated in April 2021) and has been drafted to align with the Bill.

The Code is intended to assist lease parties to resolve rent disputes, by explaining the scope and contents of the Bill, providing guidance on best practices, and detailing the principles (‘the Principles’) that should guide parties in negotiations, and, which will assist arbitrators considering what awards to make under the new binding arbitration scheme (discussed below).

The Principles include that;

1. The aim of the Code/Bill is to preserve ‘viable’ businesses;

2. The preservation of the tenant’s business should not be ‘at the expense of the landlord’s solvency’;

3. A tenant should pay arrears where they can without delay; and

4. Parties should transparently provide sufficient documentation/information for the other party to understand their position.

So, the Code and the Bill are designed to work hand in glove. For that reason, when I refer below to the Bill, I will also be referring to the Code unless I say otherwise.

The Bill

The Bill provides for the ringfencing of certain tenant lease debts which have accrued due to the tenant being mandated to close their premises during the pandemic.

If a tenant has a relevant debt arising during the relevant period, then the Bill provides among other things that parties can refer the matter to binding arbitration, which will determine what should happen to that debt (ie when and if it should be paid).

Who and what will the Bill apply to?

The Bill will apply to commercial tenants and landlords in England and Wales, in cases where the tenant:

1. Is or was in occupation of a premises under a lease which satisfies the requirements of Part 2 to the Landlord and Tenant Act 1954 (primarily that the tenant occupies the premises for the purpose of business).

2. Has a ‘protected rent debt’, ie:

2.1. A debt constituted of rent, service charges, interest and/or insurance charges which arose under a lease during the ‘protected period’, ie from 21 March 2020 to when the date of the last restrictions were removed from the tenant’s specific market sector. These restrictions do not include guidance to continue wearing face masks. It is irrelevant whether the tenant was able to trade (in whole or part) during that period. So, for example, for non-essential retailers in England and Wales, the protected period will run from 21 March 2020 to 12 April 2021, and for bars and restaurants it will run from 21 March 2020 to 18 July 2021. The Code includes list of the dates when various sectors within the economy were mandated to close their doors, and, when those mandates ended. So, the ‘protected period’ will depend on the nature of the tenant’s business. (I expect this list will become very familiar to legal advisors in the coming weeks).

2.2. The tenant’s business was ‘adversely affected’ by the pandemic (ie some or all of the premises was mandated to close during the pandemic under the Public Health (Control of Disease) Act 1984). So, a business that was not legally required to close cannot take advantage of the Bill regardless of how badly its business was affected (say as a result of reduced footfall). The consideration of whether a tenant was forced to close its premises during the pandemic, and therefore had suffered to a greater degree, reflects recent county court decisions in lease renewal claims where the courts considered whether or not to allow a ‘Covid rent cessation’ clause. It’s not surprising that this thinking made it into the Bill.

If any one of the above criteria are not satisfied, the Bill will not apply. In such cases, the Code asserts that ‘… tenants should pay in full if they are able to… ‘ and parties are ‘… strongly supported… ‘ to use the Principles to negotiate and come to an agreement.

What's new?

Arbitration scheme

The most eagerly awaited element of the Bill, is the introduction of a new binding arbitration scheme (‘the Scheme’).

Purpose

The Scheme’s ‘… aim [is] to preserve – in so far as possible – the tenant business and the jobs that it supports, without undermining the solvency of the landlord’’. In this way, the Scheme is analogous to a creditor voluntary arrangement (aka a CVA) or administration; it allows tenants space to trade out of trouble.

The process

If the Bill applies, and the parties to a lease are unable to reach an agreement, then either party can serve a 14-day notice asserting they wish to refer the matter to the Scheme. This initial notification must include proposals for settlement.

The respondent can either respond accepting the initiator’s proposals or make a counter proposal.

If no agreement can be reached (and unless the tenant is subject to an insolvency arrangement), either party can refer the matter to the Scheme to be heard by an approved arbitrator. The parties can apply to the Scheme, even if this does not comply with any dispute resolution mechanisms under the lease.

If the tenant is the applicant, then it should include evidence of its ‘viability and affordability’ (eg information and documents regarding its financial position and expenditure) by submitting a written statement. The landlord will then have 14 days to respond and submit any supporting evidence.

Any statements must be signed by a ‘statement of truth’, ie a formal declaration confirming the belief that the contents of the document are accurate. If the contents are known to be incorrect, and a statement of truth is given, the deponent could be held in contempt of court and face a fine and/or 30 days’ imprisonment.

The parties can then choose whether to have a public or private hearing, or, whether to have the matter heard on paper.

Generally speaking, within 14 days of the hearing or consideration of the papers, the arbitrator will then make an ‘award’ (ie a decision) which will depend on the circumstances of the matter, for example, if the tenant’s business is viable or would become viable following relief, then the arbitrator must consider whether the tenant should be given relief and, if so, what relief (ie should the arrears be waived, reduced or re-structured). If relief is granted on terms that the tenant can repay in instalments, then the maximum time allowed for the tenant to repay will be 24 months from the date of the award.

Broadly speaking, a tenant’s rights to instigate a voluntary insolvency arrangement (such as a CVA) following the award are limited.

In making the award, the arbitrator will adopt whichever of the parties’ proposals most closely aligns with the Principles while having regard to the parties’ viability and affordability. Otherwise, the arbitrator will have discretion as to what award should be made. If the tenant’s business would not be viable even with relief, then the arbitrator must dismiss the application.

The award and the arbitrator’s reasons for granting it ‘… must …’ be made publicly available.

The award will be binding on the parties.

There is no mention of:

1. An appeal mechanism, but the Code suggests that appeals can only be made on administrative grounds (eg that the Scheme did not apply) rather than on substantive grounds.

2. What should occur if the award is not adhered to. Presumably, the parties will have leave to apply to the county court to enforce the award in the usual way.

Viability and affordability

The onus is on the tenant to prove why the arbitrator should make an award deviating from the terms of the lease, with reference to its viability and affordability.

The tenant’s business must be viable and evidence of a failure to pay rent since relevant restrictions were lifted may be evidence that this is not the case.

Viability is not defined, as the Code recognises that viable business models will vary across sectors so a ‘… one size fits all approach…’ is not appropriate. But, the Code provides that both parties should consider the viability of their businesses and whether any alternative resources are available to them (albeit neither party is expected to obtain or undertake ‘substantial’ borrowing or restructuring). In considering viability, the arbitrator will have regard to amongst other things the impact of the pandemic on the tenant’s business.

It is on the tenant to evidence why the payment(s) required under its lease are not affordable and why its proposals are affordable. The landlord can evidence what is affordable to them and whether any proposals would threaten its solvency. (It remains to be seen what this means, as arguably any reduction in rents would push a landlord closer to insolvency.)

Paragraph 60 of the Code raises a good point; where ‘… a tenant will not be viable without relief, but the relief requested would push the landlord into insolvency’. However, the Code (unhelpfully) does not go on to really answer that question, other than to say the landlord should consider the least amount of relief that it could suffer whilst maintaining its solvency.

In considering viability and affordability, the arbitrator will take into account any steps taken by the parties to intentionally manipulate their financial position to benefit from the Scheme and an award.

Fees

The amount of fees under the Scheme will depend on the value of the amount of arrears owed.

Broadly speaking – the parties will share the costs of the hearing (if there is one) and the arbitrator’s appointment. The parties will bear their own legal costs.

Timings

Parties can apply to the Scheme for up to six months after the Bill comes into force. The government anticipates the Scheme commencing on or around 25 March 2022, so the Scheme should cease in late September 2022, albeit there is scope for it to be extended.

Money claims

One of the few enforcement options left open to a landlord, was to issue a ‘money claim’ seeking a judgment for the amount of arrears owed.

However, the Bill restricts this by providing that money claims for relevant debts cannot be issued and judgments cannot be enforced during the ‘moratorium period’. This is the period starting when the Bill comes into force and ending six months’ after, or, when an application concludes (ie when either the application is withdrawn, the period for appealing expires without an appeal being brought, or an appeal is determined) (‘the Moratorium Period’).

If a money claim is issued before the Moratorium Period starts, the tenant (and its guarantor) may apply to the court requesting that the claim is stayed. If such an application is made, and the Bill applies, the court ‘… must…’ stay the claim.

If a money judgment is obtained before the Moratorium Period, the tenant (and its guarantor) can apply to refer the judgment for arbitration under the Scheme. Otherwise, the landlord is prevented from enforcing the judgment. If the judgment is referred under the Scheme, then the judgment will be altered in accordance with any award.

Forfeiture, Commercial Rent Arrears Recovery (CRAR), insolvency proceedings and tenant deposits

In respect of a debt to which the Bill applies, then during the Moratorium Period a landlord must not; forfeit the lease; use CRAR; present a winding up petition on a specified ground; present a bankruptcy petition on a specified ground; and/or draw down on a rent deposit.

During the Moratorium Period, a tenant is also not required to make good any shortfall in a rent deposit, if a landlord has drawn down on it in respect of a relevant debt, before the Bill comes into force.

(Don’t forget that a landlord is currently prevented from using forfeiture and CRAR until 25 March 2022. Also, a landlord’s ability to utilise winding up and bankruptcy petitions are heavily modified).

Our comment

The Bill (if it applies) will generally be unwelcome news to landlords; it is arguably the coup de grâce on their ability to unilaterally recover arrears. A landlord’s hopes of making even a partial recovery, at least for the foreseeable future, rest wholly on the Scheme which itself dilutes the potency of a landlord’s effectiveness.

The intention of the Bill is clear; the government wants this issue over with, and swiftly, as part of its ‘levelling up’ strategy. Landlords may take the brunt, but the government likely hopes that they can grin and bear it for a while longer.

Landlords may find some comfort knowing the Bill will only apply for a short period, and arbitrators should be making fair and reasonable awards. Also, the scope of the relief is narrower, meaning landlords will have free reign to pursue pre/post lockdown arrears, and, to pursue all arrears for tenants who were not mandated to close or who are ‘licencees’ rather than tenants under a business tenancy. The fact that the Bill has defined what is meant by ‘adversely affected by coronavirus”’ should also reduce scope for arguments.

But any comfort will be limited given experience suggests the period in which the Bill applies will be extended, and, the Scheme’s effectiveness is yet to be tested. It also likely rubs salt in the wound that landlords must now disclose confidential information regarding their financial status to justify why tenants should satisfy their pre-agreed contractual obligations.

Before the Bill or the Scheme come into force, tenants may continue to try to persuade the courts to stay any ongoing money claims. The courts have historically adopted a fact-specific and mixed approach to such arguments, although they refused to stay the presentation of a winding-up petition pending the assent of the Corporate Governance and Insolvency Act 2020. We will have to see how this plays out, particularly given that tenants now have the benefit of the Code which provides a lot of detail regarding how the Bill will function.

Larger landlords (because of their increased affordability) will likely be subject to harsher awards. But this may be offset by these landlords being able to afford more sophisticated professional accounting, legal and advocacy services to assess the tenant’s financial status and present the landlord’s case in the best way possible. The opposite may be said of smaller landlords.

One can imagine that this will cause chaos in the already overstretched court system, but I can see the argument that this chaos will at least be managed down a specific and narrow alternative process (ie under the Scheme).

The Scheme has also been designed to be inexpensive and swift, cutting away much of the more expensive and time-consuming aspects of litigation. But, I query how inexpensive the Scheme will be (as with all alternative dispute resolution). For example, how is a lay landlord meant to assess the viability of the tenant’s business, without first obtaining the relevant documents and without secondly procuring professional services. These exercises alone are likely to increase costs and delay.

One fly in the ointment, which is not covered at all in the Bill or the Code, is what will happen if the tenant does not comply with the award. A landlord may feel huge frustration knowing that a tenant is dissipating its assets to the landlord’s detriment while arrears are already significant, when it is prevented from taking any steps to remedy this.

A further issue for landlords will be tenants playing strategically for time. A tenant could string matters out and then apply to the Scheme as late as possible, to make the most of the restrictions under the Moratorium Period. There does not seem to be a sanction for a delayed application for the Scheme. (Landlords may do well to ‘bite the bullet’ and apply to the Scheme as soon as it’s possible to do so).

What remains to be seen is what will happen if the arbitrator must choose between the survival of a viable tenant’s business, or the landlord’s business. I anticipate cases will deal with this in due course and in the meantime the legal industry will likely hold its breath waiting for judgments which clarify and interpret the meaning of the Bill. Given the Bill’s importance, I wouldn’t be surprised if any cases dealing with the Bill were fast-tracked to the courts of appeal for guidance. Watch this space.