The government has now published the eagerly awaited Bill to address the backlog of unpaid rent on commercial premises that has accrued during the ongoing coronavirus pandemic. The intention is for it to become law in March 2022.
Readers will recall from our previous article that early in the pandemic the government introduced measures to prevent landlords using the usual recovery tactics of forfeiture and CRAR, and put a stop to insolvency proceedings against tenants. Those restrictions have been repeatedly extended and are currently in place until March 2022. Evidence gathered by the government prior to publication of this Bill put the pool of arrears of rent at a figure of £1.7 billion according to landlords, 80% of which was said to relate to the retail and hospitality sectors.
The government published a code of practice in 2020 encouraging landlords and tenants to reach agreement or compromise on arrears where appropriate. While in many cases such agreements have been reached, a large pool of unresolved arrears remained. If new arrangements are not made, there is a fear that these unresolved disputes could result in a deluge of forfeiture of leases or insolvency proceedings against tenants in large numbers once enforcement moratoriums expire.
In broad terms the Bill applies to arrears of rent, service charge, insurance and interest (including withdrawals from a rent deposit) relating to the period 21 March 2020 to 18 July 2021 at the latest where regulations have required closure of all or part of a business or premises during that period. The end date differs in Wales. The Bill provides an arbitration process to resolve such disputes over what we will call ‘ring-fenced arrears.’
There are additional provisions preventing steps being taken to recover such arrears for a period of six months from the passing into law of the Bill, targeted for March 2022, and extended until the end of any arbitration procedure commenced within that period.
Much has and will be written on the precise remit of the Bill, and indeed whether it achieves its objective. That may of course change through amendments as the Bill proceeds through Parliament. The purpose of this note is to consider in broad terms those cases that are likely to lie outside the scope or practical use of these arbitration procedures, while identifying which cases the Bill may assist.
The Bill sets out principles to be applied by arbitrators in resolving disputes over arrears. Clearly those principles must be something more than just the application of the law of contract because in most cases there will be no serious dispute that the arrears are properly due. Some tenants have defended debt claims for arrears using a variety of imaginative defences. To date, defences have usually failed.
The arbitrator’s principles are found at S. 15 of the Bill. They are:
- preserving or restoring the viability of the business of the tenant (subject to preserving the landlord’s solvency); and
- the tenant should, so far as is consistent with the above principle, be required to meet its obligations as regards payment of rent in full and without delay.
The arbitrator’s powers are limited to reducing or extinguishing the arrears and/or providing payment over a maximum of two years. In essence, the arbitrator is required to find a balance seeking to preserve both parties.
What is outside the scope of the Bill?
In 2020 and early 2021 there were several large-scale insolvencies or restructurings of businesses with substantial multiple exposures to rent for business premises, such as retail businesses with multiple stores. However, there were fewer restructurings than anticipated, in part because of the restrictions in place on insolvency proceedings and forfeiture of leases.
For such businesses, the arbitration process provided for by the Bill is unlikely to solve their problems. This is because the following issues are outside the scope of the Bill:
- dealing with tenants that cannot be restored to viability simply by addressing ring-fenced rent arrears;
- obtaining an ongoing reduction in rents outside the ring-fenced period;
- forcing a landlord to accept a surrender or quasi surrender of premises;
- obtaining one result binding multiple landlords in the same process; and
- addressing non-rent liabilities.
Landlords will no doubt complain this list of omissions highlights the fact rent is being treated in a completely different manner from other long-term business obligations. That remains the case but is also typical of rent-focussed CVA insolvency proposals.
Any tenants requiring a wider restructuring of their business are still likely to follow the route of a CVA or the new Scheme provisions in Part 26A of the Insolvency Act introduced in 2020, but they may wish to act swiftly. These restructuring procedures will not be available to a tenant while an arbitration of ring-fenced arrears is running. This prohibition ends on the conclusion of that arbitration. Given that landlords can trigger the arbitration process, there may be pressure on tenants requiring a wider restructuring to commence that process before landlords can initiate the arbitration.
Arbitration is in principle available as soon as the Bill becomes an Act of Parliament. However, the process cannot commence until either the landlord or tenant has submitted proposals to deal with the ring-fenced arrears and either a further 28 days has elapsed, or 14 days has passed since a response to the proposals has been served. It may become a case of ‘first past the post’.
Tenants with multiple landlords
The arbitration process is not well suited to use by tenants who have large numbers of leases with many different landlords. There is no mechanism to consolidate disputes across multiple properties owned by different landlords. The cost of running multiple disputes will be high and consistent results are unlikely as each arbitrator only has visibility of that particular dispute.
The Bill will work best for those smaller tenants who have exposure to a limited number of leasehold premises, who are able to pay ongoing rent as it falls due, but who nevertheless have difficulty in settling ring- fenced arrears without resorting to borrowing.
Tenants will have to bear in mind that the Bill will only provide protection from recovery of ring-fenced arrears for six months from the passing of this legislation, plus the time it takes to conclude any ongoing arbitrations.
If landlords prove reluctant to trigger arbitration for fear of the costs or uncertainty involved, tenants could potentially extend this moratorium period towards the end of 2022.
Taken together, the Bill’s provisions will drive tenants to seek a resolution of all ring-fenced arrears during this six-month window, whether by agreement or through arbitration. Before resorting to arbitration, they will have to prepare their justification for a reduction in these rents and/or their need for further time to pay.
What about rent post 18 July 2021?
These rents are not covered by the Bill’s proposals so logic would suggest that the government expects those sums to be paid in full.
Landlords are currently prevented from using forfeiture and CRAR for post 18 July 2021 rent, and from initiating insolvency proceedings, so tenants are partly protected for now. However, these moratoriums are due to expire on 22 March 2022. Extensions have been given on six occasions previously but the Bill makes it unlikely the government is contemplating a further bar on recovery beyond March 2022.
This is subject to any further lockdown steps during the winter, which could change that picture. There is provision in the Bill for the principles to apply to rents for future coronavirus-necessitated closures.
We will be publishing further comment on the arbitration procedure under the Bill, the approach to determining viability of a tenant’s business and the terms of the moratorium on recovery action that the Bill will provide.