During the pandemic, legislation was put in place to help protect businesses who were unable to pay their rent, which restricted landlords' ability to: forfeit for non-payment of rent, use the commercial rent arrears recovery (CRAR) process, and issue statutory demands or winding-up petitions.
In many cases that led to a backlog of rent arrears which landlords were unable to pursue, and so the Commercial Rent (Coronavirus) Act 2022 (The Act) was brought into force on 25 March 2022 to provide for a means of resolving the matter of these accrued pandemic arrears.
The Act introduced a binding arbitration process, with the goal to encourage parties to resolve these claims for rent arrears informally, failing which a reference to arbitration can be made as a last resort solution. Under The Act, a landlord cannot pursue their usual remedies for debt during the application period for arbitration, or whilst arbitration is in progress.
The arbitration scheme is only set to last for six months, unless extended by further legislation, and that six month period will end on 24 September 2022.
In this article we cover the basic steps that are involved in the arbitration scheme, and advice for landlords who still have tenants with unresolved arrears.
Who can apply for arbitration?
A landlord or tenant may apply for arbitration under The Act, provided that:
- The lease is a business tenancy - Within the meaning of Part 2 of the Landlord and Tenant Act 1954. This does include a contracted-out lease (as only sections 24-28 are excluded), however it does not include anything which falls outside of the 1954 Act, such as short leases for a fixed term of less than six months.
- The debt is "Protected Rent" - which is:
- Rent, service charge, interest and VAT;
- Which accrued between 21 March 2020 and the last date that the business was subject to closure restrictions (in England this is 13 May 2020 for garden centres, 12 April 2021 for non-essential retail, and 18 July 2021 for hospitality and nightclubs);
- By a business which was "adversely affected by coronavirus" which means where part or whole of the business had to close under the lockdown legislation.
- The parties have not already agreed a settlement in respect of the Protected Rent debt.
What is the arbitration process?
- Preliminary Notice - Either the landlord or tenant must notify the other party of their intention to apply for arbitration.
- Response - The other party may (but does not have to) respond within 14 days of receiving the Preliminary Notice.
- Reference to arbitration
- If a Response is not given, no reference to arbitration can be made until 28 days following the Preliminary Notice.
- If a Response is received, a reference to arbitration can be made 14 days from the date the Response was received (therefore, this can bring the referral date forwards if a Response is given promptly).
- However, either party can only make a reference to arbitration up to and including 24 September 2022 (the last business day for any referral will be 23 September 2022). Therefore, in order for a tenant to maintain their right to make a reference to arbitration, they must have served a Preliminary Notice by 26 August 2022.
The reference to arbitration must include a formal proposal for resolving the matter of relief from payment of a Protected Rent debt, accompanied by supporting evidence.
- Counter-proposal - The other party may (but does not have to), submit a counter-proposal within 14 days of receiving the proposal, which must be accompanied by supporting evidence.
- Revised proposal - Either party may (but does not have to) put forward a revised proposal, within 28 days of receiving the other party's proposal/counter proposal, which must be accompanied by further supporting evidence.
- Arbitration - The arbitrator will consider the referral and make an award.
Each party will bear their own costs in the arbitration, save for the arbitrator's fees. Although the party who makes the reference will pay the arbitrator's fee up front, when the arbitrator makes an award, they have discretion to allocate their fees as appropriate.
Advice to landlords
There have only been a small number of arbitration awards under The Act to date. However, following the recent Court of Appeal decision in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd, which gave judgment in favour of the landlords, it is clear that for tenants who want to avoid paying their full arrears, arbitration is the only option; and time is running out to make a referral to arbitration. So we expect that tenants will now be considering whether or not to send a Preliminary Notice to seek relief under The Act before the deadline of 26 August 2022.
In preparation, we recommend that landlords consider:
- Assessing the tenant's ability to pay - Should the tenant make a reference, it will need to submit evidence of its financial position in order to demonstrate that (a) it is viable as a business but (b) the full rent arrears are not affordable. In anticipation, landlords should consider who in their organisation can analyse this information and if necessary, look into appointing an external adviser to assist.
- Making offers to settle rent arrears on a repayment scheme basis - As agreements in relation to rent arrears cannot be overridden by arbitration. These could provide for repayment of debt by instalments, with a default position if instalments are missed, or a stepped payment plan linked to threshold profits, to ensure that the rent arrears are repaid in full.
- Keeping an eye on the time - The Act states that a party may (but does not have to) respond to a Preliminary Notice. If a Preliminary Notice is received after 26 August 2022 then if a landlord does not respond, it will time-bar a tenant referring to arbitration and claiming relief under The Act. This is best explained by an example - if a landlord receives a Preliminary Notice on 29 August 2022:
- If the landlord does not respond, the tenant must wait 28 days from when the landlord receive the Preliminary Notice, to refer to arbitration. This will be 26 September 2022 (which is after the statutory deadline on 24 September 2022), so the tenant will lose their right to claim relief under The Act.
- If the landlord responds on say 31 August 2022, the tenant must only wait 14 days from the date they received the landlord's Response. This will be 14 September 2022, so the tenant may still apply for arbitration and claim relief under The Act.
Therefore, if a Preliminary Notice is received after 26 August 2022, landlords should not respond if they want to avoid arbitration, and simply recover any arrears using the usual enforcement actions once the moratorium on these remedies is lifted.