Parliament announces new Code of Practice and arbitration scheme for coronavirus-related commercial rent arrears
Published on 11th Nov 2021
Government expects commercial landlords to share the burden of pandemic debt
The Commercial Rent (Coronavirus) Bill and new Code of Practice were introduced in Parliament on 9 November 2021 which, if passed, will create a legally-binding arbitration process for commercial landlords and tenants to resolve arrears disputes relating to periods of enforced closure due to the Covid-19 pandemic. The Bill is intended to come into force in England and Wales from 25 March 2022, after the restrictions on evicting commercial tenants are due to expire (see our previous Insight for further information).
Ring-fencing of arrears
The Bill provides for the ring-fencing of arrears incurred pursuant to a business tenancy as a result of mandated closures from March 2020 up to the last date restrictions were removed from the business tenant's particular sector, together with a binding arbitration process to resolve disputes. The Bill is therefore applicable to businesses involved in retail, hospitality, gyms, close contact services and other industries that were mandated to close, or partly to close, as a result of Covid-19.
The ring-fencing does not just apply to arrears of principal rent but also to arrears of service charges and insurance rent that have accrued during any mandated closures.
The Bill will not apply where landlords and tenants have already reached an agreement over the treatment of rent arrears, or where the tenant's business was not mandated to close. The British Property Federation has estimated that over 80% of cases have already reached agreement, so the arbitration process will only apply to the remaining unresolved rent arrears disputes that meet the relevant criteria. Some tenants that sought to resolve these issues last year may well view the Bill as "too little, too late".
In applicable cases, landlords and tenants will need to apply for arbitration within six months from the date the legislation comes into force. The maximum time frame to repay debts under the arbitration process will be 24 months.
The arbitration process will essentially require both parties to submit a proposal for settlement of the rent arrears together with supporting evidence. The arbitrator will either conduct a hearing (if requested) or consider the documentation to make a legally binding decision on the payment of the arrears.
What is the effect on landlord remedies?
There are further restrictions on landlords who have (until now) been free to issue debt proceedings in respect of Covid-19 rent arrears, despite restrictions on other enforcement options.
The Bill will impose further restrictions on landlords enforcing a ring-fenced debt.
Restrictions on debt recovery
From the day the Bill is passed, a landlord who is owed a ring-fenced debt will be prevented from using the following remedies for debt recovery:
- issuing debt proceedings;
- exercising commercial rent arrears recovery (CRAR);
- exercising the right forfeiture; and
- draw-down of the tenant's rent deposit.
The restrictions on these remedies will expire only when the arbitration has concluded or if arbitration is not sought within the six month window.
Stay on debt claims
Any debt claim which is issued on or after 10 November 2021 (and before the Bill is passed) will be stayed by the court if requested by either party. If the claim is not stayed and judgment is obtained, any judgment debt will constitute a ring-fenced debt and may be subject to the arbitration process. Debt claims which were issued before 10 November 2021 will not be affected.
Restrictions on insolvency arrangements
A landlord will also be restricted from initiating insolvency arrangements (such as a winding up petition) from the day which an arbitrator has been appointed and ending twelve months after an arbitration award.
Expectations on landlords
A new Code of Practice has been published which sets out the arbitration process in the Bill, the types of evidence which tenants will need to provide to substantiate their need for assistance and the key principles governing the Bill.
The code places an expectation on landlords to waive some or all rent arrears where they are able to and is also intended to assist rent dispute negotiations falling outside of the scope of the Bill. However, the Bill does make clear that the tenant should make payment of its rent debt in full and without delay, so far as this is consistent with the principle of preserving its viable business.
Rationale for measures
The government has placed great emphasis on the need for landlords and tenants to share the burden of the pandemic in order to help the market return to normal as quickly as possible and preserve viable businesses. The draft Bill makes it clear that a statutory instrument could be passed in the event of future lockdowns relating to Covid-19 or a future pandemic that results in the government legislating for the cessation of trade from certain business premises.
Osborne Clarke comment
The government's expressed expectation that landlords should share the burden of pandemic debt is likely to concern those who may be obliged to enter into the new binding arbitration process.
Landlords who proactively engaged with tenants and agreed rent concessions or repayment terms can rest assured that the draft bill does not affect the validity and the enforcement of those agreements. The greater concern for those landlords will be the likelihood of the government adopting this arbitration approach to future pandemics, which could result in a far greater costs to landlords than has been the case with Covid-19.
The government's intention to introduce the new arbitration regime on 25 March 2022 also indicates that the restrictions on forfeiture for rent arrears are unlikely to be extended beyond this date, which will be welcomed by landlords keen to recover possession.
As the Bill is only at the second reading in Parliament, it may be subject to change. Look out for our future updates which will cover any material changes made to the Bill before it is passed.