What can landlords do if a tenant has not paid its rent?
This depends on whether the arrears in question are protected or unprotected (see blue box in the flowchart below for what constitutes protected arrears and unprotected arrears).
1. Unprotected arrears - All the restrictions on landlord remedies in respect of unprotected arrears ended in March 2022. That means that landlords can pursue their usual remedies (see yellow boxes below) in respect of those arrears.
2. Protected arrears - There are still restrictions in relation to protected arrears (i.e. affecting leisure, hospitality and non-essential retail premises that legally had to close for at least part of the pandemic). Those restrictions are shown in the pink boxes below. Those arrears are "ringfenced" until 23 September 2022 (or, if an arbitration has commenced by then, that arbitration has concluded) which means landlords are prohibited from using their usual enforcement methods. The restrictions apply to former tenants and guarantors as well. During this time landlords and tenants can reach an agreement on these arrears or refer the arrears to arbitration.
3. The flowchart below illustrates this further:
The arbitration process
Timeline of the arbitration process
What award the arbitrator can make and how it will decide what award to make
What award can the arbitrator make?
4. The arbitrator's role will be to determine whether the tenant should be given "relief" in respect of payment of the protected arrears and, if so, what type of relief. The arbitrator has three options:
4.1 To provide the tenant with some form of relief in respect of the protected arrears (this might include writing off all or part of the arrears, giving the tenant additional time (up to 24 months from the date of the award) to pay in instalments or reducing any interest payable);
4.2 To require the tenant to pay everything immediately; or
4.3 To dismiss the reference.
When will an arbitrator dismiss the reference and what does that mean for the arrears?
5. The arbitrator must dismiss the reference if the parties have already come to an agreement on the protected arrears or if the arbitrator determines that the tenant's business is not viable and would not be viable even if the tenant were to be given relief of any kind.
6. If the arbitrator dismisses the reference for one of the reasons above it is probable that that will bring the moratorium on landlords' enforcement methods to an end. The Act says that the moratorium shall end on either the 23 September 2022, or the "day on which the arbitration concludes". So if a reference is dismissed, that probably means that the arbitration has concluded and the moratorium will therefore end.
If the arbitrator does not dismiss the reference, how will he/she decide what relief to give?
7. If the arbitrator considers that the tenant's business is viable or would become viable if given relief, the arbitrator must then decide how much, if any, of the protected arrears a tenant can pay within the next 24 months whilst preserving the viability of its business.
8. In doing so, the arbitrator will consider proposals for relief put forward to them by the parties. These proposals must be supported by evidence which will likely be in the form of an expert accountant's report commenting on and analysing financial information relating to the tenant.
9. In most cases, both parties will put forward a proposal:
9.1 If the arbitrator considers that both proposals are consistent with the principles in the Act (on which see below) the arbitrator must make the award on the terms set out in whichever of them the arbitrator considers to be the most consistent.
9.2 If the arbitrator considers that one proposal is consistent with the principles in section 15 of the Act but the other is not, the arbitrator must make the award on the terms set out in the proposal that is consistent.
9.3 Otherwise the arbitrator must make whatever award the arbitrator considers appropriate.
What do these principles say?
10. The Act provides that the tenant should pay all the protected arrears in full and without delay so far as is consistent with preserving, or restoring and preserving the viability of the tenant's business and so far as is consistent with preserving the landlord's solvency.
11. Landlord solvency will not be a relevant consideration for most big institutional landlords so the main focus for the parties and the arbitrator will be the tenant's viability.
12. Viability is not defined in the Act or the accompanying guidance. However the following points will be relevant when assessing viability:
12.1 The key question is whether, protected arrears aside, the tenant's business has or will in the foreseeable future have, the means and ability to meet its obligations and to continue trading;
12.2 The arbitrator can consider the impact on the tenant's other debts and their wider financial situation;
12.3 The arbitrator must have regard to (i) the assets and liabilities of the tenant, (ii) the previous rental payments made under the business tenancy from the tenant to the landlord, (iii) the impact of Covid on the business of the tenant and (iv) any other information relating to the financial position of the tenant that the arbitrator considers appropriate;
12.4 The arbitrator must disregard the possibility of the tenant borrowing money or restructuring its business; and
12.5 The arbitrator must disregard anything done by either party to manipulate their financial affairs so as to improve their position in relation to an award.
13. The guidance says that as a minimum, the tenant should provide the last 12 months' full bank account information, including savings accounts, current accounts and loan accounts. The landlord can always ask the arbitrator to order the tenant to provide more, or better, financial information.
Are arbitrators likely to make a binary choice between the parties' proposals or are they more likely to pick their own figure?
14. This is an untested area and we do not yet know how arbitrators will approach this. Arguably there is only one figure that can give full effect to the principles. That is because a figure that is higher would miss the aim of preserving the viability of the tenant's business and a figure that is lower would mean the tenant is not being required to meet its obligations to pay the protected rent in full.
15. Where the parties' proposals are reasonably close, the arbitrator may regard both proposals as in the same "rough area" of what a tenant can pay whilst preserving viability, in which case we think it likely that they will just pick the one that they view as most consistent with the principles. However if the arbitrator comes to a figure which is materially different to either party's proposal, we think it is more likely that the arbitrator will pick his/her own figure.
Will arbitrators need to instruct their own expert in order to decide upon a figure?
16. Quite possibly, particularly those arbitrators who do not have a financial background. In some cases, the arbitrator will be a barrister and may therefore have a limited understanding of complex financial information.
17. The Act provides that arbitrators can instruct their own expert to assist them if they wish. The parties must be given a reasonable opportunity to comment on any information, opinion or advice offered by such an expert.
Who pays the costs of all of this?
18. The usual position will be that the arbitrator's fees will be split equally between the parties. Otherwise the parties have to bear their own legal and other expenses of the arbitration.
When is the deadline to kick start the arbitration process?
19. The deadline for referring protected rent arrears to arbitration is 23 September 2022 (although this may be extended by the government). However in order to make the referral, the referring party must notify the other party of its intention to do so. That party then has 14 days to provide a response. The referring party must then wait either (i) 14 days from the other party having provided a response to its proposal or (ii) if no response is provided, 28 days from service of the notice of intention before it can formally refer the matter to arbitration.
20. The real deadline is therefore 25 August 2022 (as that is when the notice of intention would need to be served) and we would strongly advise serving the notice in good time before then to avoid any issues with service.
Has there been much uptake?
21. No, the uptake has been very low. We are acting on one of the very few arbitrations for a landlord client – it is high value and hotly contested and we expect the final award to be given later this summer. We hope that the award will clarify some of the central issues under the Act (including how viability is measured and what factors can be taken into account) so watch this space!
Is the arbitration scheme a good idea?
22. There is little incentive for landlords to start the arbitration process. If landlords sit tight and the deadline of 25 August 2022 passes without tenants serving a notice of intention, then all the usual landlord remedies will become available again in respect of those arrears.
23. The amount of arrears actually owing should be considered. Whilst the process is intended to be quick and streamlined, our experience is that the whole process can easily become lengthy and expensive particularly if the tenant in question is large and has a complex financial structure or is not prepared to be candid about its true financial position.