Radical proposals in the Commercial Rent (Coronavirus) Bill 2021-2022

Some radical proposals are included in the Commercial Rent (Coronavirus) Bill which the Government intends to pass by 25 March 2022.

Seen as a roadmap back towards normality, the property sector is expected to absorb some of the punishment inflicted on occupiers by the pandemic through a new binding arbitration process.

Liz Shaw, director and property litigator at Wake Smith Solicitors, explores the details and implications of the Bill.

If passed, it will ringfence rent debts built up as a result of mandated business closures during the Covid19 Pandemic. 

It introduces a new binding arbitration process aimed at resolving disputes relating to those protected rent debts where Landlords and Tenants have not yet been able to reach agreement.

The aim of the Bill which will also be supplemented by the New Code of Practice for Commercial Property Relationships following the Covid19 Pandemic which was introduced on 9 November 2021 (the New Code) is to put additional pressure, beyond mere encouragement, on Landlords and Tenants who have not yet previously engaged in serious negotiations.

What tenancies will the Bill apply to?

The Bill will apply to business tenancies and will apply to tenancies that satisfy the qualifying criteria under the Landlord and Tenant Act 1954 and include the following:-

• Leases
• Under-Leases
• Tenancy by Estoppel
• Periodic Tenancies (whether express or implied)
• Agreement for Lease
• Agreement for Under-Lease

It is also considered that a contracted-out lease will be a business tenancy for the purpose of the Bill.

It is therefore likely that the following will not be classed as business tenancies:-

• Licences
• Tenancies at Will
• All those tenancies to which the 1954 Act specifically does not apply, for example agricultural holdings, service tenancies, mining leases, tenancies for 6 months or less, farm    business tenancies or home business tenancies.

There are also some uncertainties as to the whether the Bill will protect Head Tenants, Assignees, or what happens to rents due on expired tenancies.

It is therefore not clear whether the Bill will provide protection to the Tenants who may have informed their Landlord that they no longer claimed a right of occupation and did not intend to return even when the closure restrictions were lifted.

Rents to which the Bill will apply:

The Bill will protect rent arrears (including service charges, insurance rent, interest and VAT) that accrued during a ring-fenced period from 21 March 2020 to the date when specific restrictions were last removed for the relevant sector.

The protected rent debt is any rent accrued during the relevant period which is defined as beginning on or after 2pm on 21 March 2020 and ending as shown below:

• Garden Centres – 13 May 2020
• Non-essential retail – 12 April 2021
• Hospitality and night clubs – 18 July 2021

The end period for Wales is 6am on 7 August 2021.

Appropriation

The Bill will contain provisions that will override the general law of appropriation.

Ordinarily, where several separate debts are due from a Tenant to a Landlord the Tenant where making a payment can specify that the money is put towards a particular instalment.  If accepted by the Landlord that Landlord must apply it to that particular instalment.

If however the Tenant makes no stipulation the Landlord can appropriate the money as it chooses and usually a payment can be put to the earliest rent payment due.

The Bill will change the rules so that the Landlord must apply the payment to meet the unprotected rent debt first before it is applied to the protected rent due.

Arbitrator’s powers

The Arbitrator will be able to make an award that does one or more of the following in relation to the protected rent debt:

• Write off the whole or any part of the debt
• Give time to pay the whole or any part of the debt for example by instalments (the dates of instalment payments must be within a period of 24 months beginning with the day after the day on which the award was made)
• Reductions (including to zero) of any interest otherwise payable by the Tenant in relation to the whole or any part of the debt

Moratorium

Both parties will have a six month window from the date on which the Bill is passed to refer the matter to arbitration and there will be a moratorium in place to prevent the Landlord taking steps until the six month period for making a referral to arbitration has ended.

The moratorium will also prevent Landlords presenting Winding Up and Bankruptcy Petitions.

Claims

Claims started before 10 November 2021 are unaffected although other protective measures are still in force until March. 

Claims started after 10 November 2021 but before the Bill is passed (expected March 2022) will be affected by retrospective provisions in the Bill.

Either party can apply to Court for the proceedings to be stayed. Parties also includes Guarantors.

Landlord Restrictions

The Bill will severely impact upon Landlords’ rights for the rent due during the moratorium period.

Arbitration Scheme

The Secretary of State will approve one or more bodies to maintain a list of Arbitrators who are suitably qualified or experienced to act as Arbitrators under the Bill and have the right to appoint an Arbitrator or a panel from that list and to set the fees for doing so.

Requirements before making a reference to Arbitration

The party that intends to refer a case to Arbitration must notify the other part of its intention before it makes the referral.  The New Code suggests that the party that intends to make the referral should attach a proposal for settling the unpaid debt to its letter of intention (although the Bill does not contain such a requirement).  The party that receives a letter of intention may submit a response within 14 days.  If there is no further response within 14 days thereafter (i.e. a period of 28 days beginning with the date on which the letter of intention is served) the reference to Arbitration can be made.

A reference to Arbitration cannot be made where either a Company Voluntary Arrangement (CVA) or an Individual Voluntary Arrangement (IVA) have been approved or have been proposed and is awaiting a decision or where a compromise or arrangement under the Companies Act 2006 has been sanctioned or applied for and is awaiting a decision.

There is a prohibition on entering into a CVA or IVA once a referral has been made to Arbitration until either 12 months from the date of the Arbitrators Award or, if sooner, the date on which the Arbitrator dismisses the reference, the award is set aside on Appeal or Arbitration proceedings are abandoned or withdrawn.

Arbitrator’s Principles

When making an award, the Arbitrator must have regard to the following two principles:-

• Where the Tenant’s business is viable, or would become viable if the Tenant were to be given relief from payment of any kind, any award should be aimed at preserving, or restoring and preserving the viability of the Tenant’s business so far as that is consistent with preserving the Landlord’s solvency.
• So far as it is consistent with the first principle, Tenants should be required to pay protected rent in full and without delay.

The Arbitrator must disregard anything done by either party with a view to manipulating their financial affairs.

Arbitrator’s Assessment of viability and solvency

In assessing the viability of a Tenant’s business the Arbitrator must have regard to the following:

• The assets and liabilities of the Tenant including any other tenancies to which the Tenant is a party
• Previous rental payments made under the business tenancy
• The impact of Coronavirus on the Tenant’s business
• Any other information relating to the financial position of the Tenant that the Arbitrator considers appropriate

In assessing the solvency of the Landlord the Arbitrator must have regard to:

• The assets and liabilities of the Landlord including any other tenancies to which the Landlord is a party
• Any other information relating to the financial position of the Landlord that the Arbitrator considers appropriate

The New Code provides a list of relevant factors in Annex B.

Oral Hearing

An oral hearing must be held where either or both of the parties make a request to the Arbitrator and must be held within 14 days beginning with the day on which the Arbitrator receives a request (although this period can be extended by agreement or if the Arbitrator considers appropriate).

Timing of Arbitrators Award

Where there is no oral hearing the Arbitrator must make an award as soon as reasonably practicable after either of the following:

• The day on which the last final proposal is received where both parties have put forward a final proposal
• Otherwise the last day on which a party may be put forward a revised formal proposal

Publication

The Arbitrator must publish the award together with reasons for making it but can exclude confidential information. 

Enforcement

An award will be enforceable in the same way as any other arbitration award so with permission of the Court in the same manner as a Judgement or Order of the Court to the same effect.

It is unclear at this stage whether the Landlord would have to apply to restore Court proceedings in order to enforce an Arbitration Award in respect of a stayed claim or to apply through the Courts for any post 10 November 2021 claim.  It is also not clear whether the Landlord can use the Tenant’s non-compliance as the basis of a Statutory Demand or Petition without applying for Judgment first.  There is also particular uncertainty on whether an award would preserve the Landlord’s right to forfeit the lease.

It is hoped that further clarification and guidance will be provided on some of these matters before the Bill comes in to force.

For further advice on landlord issues contact Liz Shaw at Wake Smith Solicitors on 0114 266 6660 or at [email protected] 

Published 22/02/22