Background of the Act
The Commercial Rent (Coronavirus) Act 2022 (Act) received royal asset on 24 March 2022. The Act introduced a binding arbitration procedure in respect of disputes relating to COVID-19 commercial rent arrears. This briefing follows on from our initial briefing in November 2021 following the publication of the draft Commercial Rent (Coronavirus) Bill.
We are now beginning to see the first published arbitration decisions under the Act. These decisions provide a useful insight as to how the COVID-19 lockdown regulations introduced in 2020 and 2021 (Lockdown Regulations) will be retrospectively interpreted for the purposes of the Act. Three key decisions have been published so far by Falcon Chambers Arbitration which we examine below.
Signet Trading Limited
The first known arbitration award under the Act involved Signet Trading Limited (Signet), a large specialist retail jeweller which operates around 300 retail stores under the H Samuel and Ernest Jones brands. Signet had accrued rent arrears of almost £450,000 between March 2020 and March 2021 solely in relation to its office headquarters where only 2 employees remained working during the pandemic.
Under Section 4 of the Act a “protected rent debt” is defined as a debt under a business tenancy where the tenancy was “adversely affected by coronavirus”.
“Adversely affected by coronavirus” means that:
- the whole or part of the business carried on by the tenant at or from the premises comprised in the tenancy, or
- the whole or part of those premises
was of a description subject to a closure requirement (i.e., a requirement imposed by regulators to close all or part of a business or premises).
Signet argued that the office premises were subject to a “closure requirement” imposed by Lockdown Regulations. In opposition, the Landlord contended that the office was never required to close.
Signet attempted to argue that whilst the office did not match the specified use category required to close, the office supported the wider retail business which did and therefore the office was, in effect, also subject to a closure requirement. Signet also argued that, as its head office employees were able to carry out the business elsewhere, they were not permitted to access the premises. Therefore Signet contended that its business was adversely affected by coronavirus during the relevant period.
The arbitrator ultimately dismissed Signet’s arguments, concluding that the Lockdown Regulations did not require the closure of the office, and that the business operated from the premises was not subject to a specific closure requirement. Accordingly, the business was not “adversely affected by coronavirus” and arrears relating to the office were not a protected rent debt under the Act.
The decision is interesting for two reasons:
- It provides clarity that office premises were unaffected by the “closure requirements” imposed by Lockdown Regulations and that, no consideration will be given to the “business” which an office purportedly supports.
- The arbitrator explained that the obligation to work from home wherever possible was upon individuals, rather than on persons carrying on a business. Whilst the indirect effect of that provision was that many offices remained empty for a significant period, that does not entitle a tenant to rent relief.
This decision is one which landlords of office blocks will welcome with relief. If Signet had been successful there would have been a real risk of a split system of awards for office tenancies whose wider business was either in retail or hospitality and no such relief for businesses operating in other sectors which were not forced to close during the pandemic despite being adversely affected.
The second award under the Act involved KXDNA Limited (KXDNA) and illustrates the procedural nuances of the new arbitration process and in particular the approach to what is likely to be regarded as a “proposal” for the purposes of the Act.
KXDNA is a recreational services provider. It was agreed that KXDNA’s rent arrears should be repaid via instalments however the parties remained in dispute over the aggregate quantum of arrears that KXDNA could repay whilst keeping its business viable. KXDNA contended that it could repay £407,000 whilst the landlord’s initial proposal, submitted to KXDNA via letter, was for just over £1.35m.
The landlord’s expert evidence to support the £1.35m figure contained some errors. The arbitrator granted permission to the landlord to correct those specific arithmetical errors. Accordingly, the landlord served an amended initial proposal on KXDNA who contended that the landlord was serving a “revised proposal” under section 11(4) of the Act. If KXDNA were successful in its argument, the landlord would not have another chance to amend its proposal (as the Act permits only two proposals per party).
The arbitrator found that the landlord’s letter containing the £1.35m figure was not a “formal proposal” under section 11(7) of the Act. Section 11(7) of the Act requires a “formal proposal…to be expressed to be made for the purposes of this section”. The landlord will therefore be able to issue a revised proposal under the Act in due course.
Parties can infer from this that an explicit reference to section 11 of the Act must be contained in communications in order to be considered a “formal proposal”. This is an important procedural learning taken from this decision.
Rush Hair Limited (Rush), a tenant of Westfield Shopping Centre, had accrued around £81,000 of arrears during the relevant period. Rush initially failed to respond to the Landlord’s arbitration application. The arbitrator’s decision was clear - the absence of a response would not preclude the arbitration process from progressing as it is a statutory process which cannot be set-aside.
Rush’s solicitors subsequently responded stating that they would not be engaging in the arbitration process as Rush was due to enter insolvency proceedings. Whilst the arbitrator did grant a short stay on proceedings to clarify Rush’s solvency status, the arbitrator subsequently affirmed that the announcement of a proposed voluntary liquidation by Rush would not have any bearing on the validity of the arbitration. Indeed, the decision specifically highlights that voluntary liquidation, in contrast to compulsory liquidation, does not automatically stay arbitration proceedings under section 130 (2) Insolvency Act 1986. Whilst the arbitration proceedings were seen through to conclusion, ultimately the arbitrator concluded that Rush was not in a position to meet its obligations and remain viable so dismissed the arbitration referral.
These decisions provide useful clarity on how the Act may be interpreted by arbitrators and highlights some key procedural aspects which parties and their advisors should keep in mind when arbitrating under the Act. Reports suggest that there has not been a large influx of cases under the Act. It remains to be seen whether this will change prior to the current deadline of 23 September 2022 for making a reference to arbitration under the Act, but time is quickly running out.