What is Commercial Rent Arrears Arbitration Scheme?

The Covid pandemic created huge gaps for commercial property owners in the UK. While they were already struggling to manage their rental business with no or lesser rent from their tenants the Government went ahead and passed legislation to protect the tenants.

On November 9, 2021, the UK Government published its proposals regarding a new Code of Practice together with draft legislation, known as the Commercial Rent (Coronavirus) Bill, to deal with arrears accumulated during the Covid pandemic period.

The New Legislation Highlights

The ‘Commercial Rent (Coronavirus) Act 2022’ was declared as a law on March 25th, 2022, to help resolve certain remaining commercial rent debts accrued because of the pandemic.

The legislation introduces a new arbitration system binding on landlords and tenants who have not already reached an agreement. This will resolve disputes about certain pandemic-related rent debt and help the market return to normal as quickly as possible. Tenant arrears will be written off and/or payment will be deferred at the arbitrator’s discretion.

The legislation also limits the tools that landlords have previously had to enforce debts due by tenants who are covered by the plan.

The Law Applies to

The law applies to commercial rent debts of businesses that were mandated to close, in full or in part, from March 2020 until the date restrictions ended for their sector. Debts accrued at other times will not be in scope. These are |

• Hospitality & nightclubs
• Non-essential retail
• Garden centres
• Personal care including hairdressers
• Hotels and tourist accommodation
• Sport & leisure
• Theatres, cinemas & large event venues

Other industries, such as firms that operate out of offices, are not included (and hence are not protected by the law), even if Covid has had a significant impact on those businesses, forcing them to temporarily close.

Furthermore, the government has stated that the scheme is solely for enterprises that are unable to pay their ring-fenced debts. Those businesses that appear to be eligible for the plan but are unable to pay will be expected to pay their arrears in full to their landlord. The programme is not intended to serve as a haven for well-heeled tenants. Similarly, the scheme only applies to “viable” enterprises (or would be viable if they received relief from COVID arrears). While the Code of Practice does not define viability, if a tenant has been unable to pay its rent since the restrictions were released, the landlord is likely to use this as evidence that the tenant is not a viable business and so ineligible for the programme. A tenant who is insolvent or soon to become insolvent is ineligible.

Which periods are caught by the scheme?

The scheme is only applicable to debts accumulated during a “protected time.” A protected period is a time during which a tenant’s business was forced to close due to government restrictions, which began on March 21, 2020, and ended at various times for different sectors, with the most recent date being the earlier of July 18, 2021, and the last day on which the tenant’s business was subject to restrictions. The “ring-fenced debt” refers to the arrears accumulated during this period.

Does the scheme just apply to arrears of rent?

The scheme covers not only rent arrears, but also service charges, insurance, and interest, as well as any other amounts owing under the tenant’s lease throughout the protected period.

How does the arbitration work?

Landlords and tenants who are caught up in the plan are encouraged to try to work out a negotiated solution for the ring-fenced debt. If they can’t come to an agreement, either side can take the matter to arbitration. They must apply within six months of the legislation’s enactment to do so. It appears that the six months is meant to be a hard deadline.

The arbitrator will be selected from a list of arbitrators compiled by the government. The landlord and tenant will then have the option of having a public hearing or, if no party requests one, the arbitrator will reach a decision based on the documents presented by the parties.

In terms of the arbitrator’s powers |

• The arbitrator will be able to write off or defer payment of arrears (for up to 24 months) that relate to a protected period.
• In making their decision the arbitrator is to be guided by the principles set out in the Code of Practice – with the overarching aim being to preserve the viability of the tenant’s business albeit this should not be “at the expense of the solvency of the landlord”.
• The arbitrator must accept whichever of the claims made by the landlord and tenant is, in their view, most appropriate. However, any relief granted to the tenant “should be no greater than necessary for the tenant business to afford the payment”.

What is the position where the parties have already reached an agreement?

Landlords and tenants are advised to continue negotiating in accordance with the principles outlined in the Code of Practice until the legislation takes effect. If a settlement or rent concession has already been agreed upon and/or executed before the enactment of the legislation, the parties’ agreements shall remain binding. The method cannot be used to reopen settlements that have already been reached.

Can landlords still issue court proceedings in relation to arrears?

Landlords who filed court papers regarding ring-fenced debt before November 10, 2021, are permitted to proceed with their cases as usual. Any proceedings filed on or after November 10, 2021, will be stayed until the later six months after the enactment of this law or the conclusion of any arbitration proceedings. The moratorium on court proceedings for ring-fenced debt will be effectively extended to August 2022 at the earliest if the law is approved in March 2022 as envisaged.

Landlords, on the other hand, will be permitted to bring legal action against tenants for debts that do not fall inside the protected period.

About ring-fenced debt, there are comparable constraints on landlords starting forfeiture, Commercial Rent arrears Recovery, and insolvency actions.

What is the position concerning rent deposits and guarantors?

The proposed legislation simply mentions “landlord” and “tenant,” and it appears that the legislation is primarily concerned with the financial condition of the parties, not the status of any parent businesses or guarantors. As a result, it appears that guarantors will benefit from any arbitration ruling in the tenant’s favour because, once rentals are cut or deferred by an arbitrator, the guarantor will only be responsible for the decreased/deferred rent.

Landlords would also be barred from using tenancy deposits to pay for unpaid ring-fenced rental arrears. If a landlord has previously depleted a deposit and used it to cover the ring-fenced debt, the tenant’s contractual obligation to replenish the deposit is suspended.

 Summing-up

When the system is in effect, the Legislation eliminates the last resort for landlords, which was issuing a debt claim and drawing down on any rent deposit. Coupled with the fact that landlords will be unable to pursue third-party guarantors for ring-fenced debts, landlords will have no choice but to engage in genuine negotiations with their tenants. Landlords will be expected to concede if a tenant can demonstrate that its business is still viable but that it is unable to pay some or all of the ring-fenced arrears. If a tenant and landlord cannot agree, an arbitrator will eventually force the landlord’s hand.

The legislation passed on 25th March 2022, will allow the tenant’s lease to be forfeited unless the government enacts further legislation. In the meantime, landlords are free to pursue their other options, such as filing debt claims.

If you need help with recovering your rent arrears from your tenant talk to Shergroup. We’re here to help you with end-to-end property solutions, expert legal advice, and enforcement solutions to help you recover your rent arrears. Contact us to know more about how we can help.

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