The Commercial Rent (Coronavirus) Bill establishes a legally-binding arbitration process to resolve outstanding issues between commercial landlords and tenants on how to share the burden of commercial rent debts arising out of the pandemic. The legislation is, subject to Parliamentary passage, due to come into force next year with a probable target date of 25 March 2022.
Prior to this, a Code of Practice has been published to assist current negotiations over covid rent debts. It encourages the parties to negotiate a settlement before the Bill becomes law, and aims to provide landlords and tenants with criteria for resolving outstanding rent debts before the arbitration scheme comes into force.
Commercial tenants to be protected from debt claims
The Bill (when it becomes law) will protect commercial tenants from debt claims, including County Court and High Court Judgments and winding-up petitions which have been issued against them in relation to rent arrears accrued during the pandemic whilst premises or businesses have been forced to close as a result of government mandated coronavirus restrictions (a protected rent debt).
The proposed Bill includes a retrospective moratorium on progressing rent claims through the courts, if such claims are started after 10 November 2021. Whether that dissuades or simply encourages landlords from pressing on with debt claims up until the Bill becomes law remains to be seen. The existing restrictions on CRAR, forfeiture and winding up petitions for unpaid rent will remain in place until the Bill takes effect, and will be continued by the Bill once it becomes law.
How is the arbitration process proposed to work?
Tenants or landlords will have a period of six months, beginning on the day on which the Act is passed, in which to refer unresolved rent debt claims to arbitration. The reference will need to include a formal proposal for resolving the matter and the other party may put forward a formal proposal in response. Evidence of an applicant's financial status will need to supplied, in accordance with a list of documentation set out in an appendix to the Bill.
When considering a reference, an arbitrator may:
- dismiss the reference if they determine that the parties have agreed to resolve the debt, the tenancy is not a business tenancy or the debt is not a protected rent debt
- dismiss the reference on the basis that the tenant's business is not viable, and would not be viable even if relief from the debt were to be given
- grant relief on the basis that the tenant's business is viable, or would become viable if they are given relief from payment.
The arbitrator's decision will be based on
- the proposals that the parties may submit
- preserving or restoring the tenant's viability, so far as that is consistent with preserving the landlord's solvency
- basic principle that debt should be paid in full and without delay subject to the tenant's viability.
The Bill does not provide a set definition of 'viable' because (as the Code of Practice states) viable business models will differ from party to party and within differing sectors.
If the arbitrator does grant relief, reliefs available comprise:
- Waiving or reducing the rent debt
- Providing for the rent debt to be paid in instalments
- Waiving interest.
Any judgment for rent obtained from the courts in proceedings started after 10 November 2021 but subsequently referred to arbitration will be altered in accordance with any award of relief made by the arbitrator.
Any tenants that have continued to not pay rent further to the lockdown trading restrictions being eased will need to carefully consider their options prior to the new legislation coming into effect. At present the restrictions on use of winding up petitions (see our commentary here), forfeiture and CRAR are wide-ranging in that they do not seek to define overdue rent by reference to a specific period of time (i.e. the period when premises were forced to close) as the new legislation will. That has to date afforded tenants a degree of breathing space and protection. However, by the time the new legislation comes into effect, tenants who have not paid their rent for any period after normal trading has resumed will now need to make payment for that portion of arrears or reach a commercial agreement with their landlords or once again face the potential threat of enforcement via the use of winding-up petitions, forfeiture and CRAR.