New Scheme For Covid-Related Commercial Rent Arrears Focuses On The Parties’ Finances

Commercial Rent (Coronavirus) Act 2022

Under the Commercial Rent (Coronavirus) Act 2022, which came into force on 24 March 2022, a statutory arbitration regime has been introduced for resolving disputes relating to arrears of rent owed by businesses required to close for a period during the pandemic, this now being known as the period of ‘protected rent’. 

The pre-existing moratorium on landlords’ remedies for rent arrears due under business tenancies has been lifted.  However, the Act introduces a fresh six month moratorium from 24 March 2022 in respect of protected rent arrears.

The new procedure provides a means of resolving disputes over protected rent arrears by reference to who, as between the landlord and the tenant, is most able to ‘take the hit’.  The procedure may well result in arrears of rent being wholly or partly written off, or becoming payable only over time.  That said, there are constraints and limits on the new procedure which can protect the position of landlords.

How the statutory arbitration regime works

The Act requires the parties to go through a compulsory pre-arbitration stage, following which either the landlord or the tenant may invoke the arbitration procedure.  This type of arbitration must be commenced within six months of the coming into force of the Act, i.e. by 23 September 2022.

Protected rent –  If the dispute does proceed to arbitration, the statutory regime provided for under the Act is confined to arrears of protected rent, that is rent due in respect of a specific period, relating to the period of mandatory closure of businesses by the authorities.  For premises in England, the period is 21 March 2020 to 18 July 2021.  For premises in Wales, the period is slightly different.

The viability principle – In order to proceed with the arbitration, the arbitrator must establish that the tenant’s business is viable or would become viable if the tenant was given any kind of relief from payment. 

The affordability principle – The procedure requires the party commencing the arbitration to submit formal proposals for payment, accompanied by evidence as to its financial position.  The idea here is to establish why the tenant cannot pay the full amount, but can pay the amount proposed. The respondent party may also submit proposals and evidence.  The parties may subsequently submit final proposals.  Certain contingencies, such as the possibility of borrowing or re-structuring a business, must be disregarded.

The award –  The arbitrator decides the matter by applying certain principles, the first of which is that awards should be aimed at preserving or restoring the viability of a tenant’s business, so far as is consistent with preserving the landlord’s solvency. 

A second principle is that tenants should be required to pay protected rent in full and without delay.  This means that tenants who can pay the protected rent should do so.

If the arbitrator permits the tenant to pay arrears of protected rent by instalment, the repayment period cannot extend beyond 24 months from the date of the award.

The general effect of this statutory regime is that, in appropriate circumstances, tenants may be given relief from paying arrears of protected rent, their entitlement to such an outcome depending on their and their landlord’s respective financial positions.

The award takes effect as if it alters the terms of the tenancy in respect of the protected rent. Therefore, tenants and other persons such as a guarantor or a former tenant will not be in breach of covenant and so at risk of forfeiture for failure to pay the rent if the tenant complies with the award.

Confidentiality – It is clear that an arbitration of this type could result in the disclosure to the arbitrator and the other party of confidential information.  By contrast, arbitrators are required to publish their awards which must set out their reasoning.  The Act requires arbitrators not to include confidential information; that is, commercial information the disclosure of which might significantly harm the legitimate business interests of the person to whom it relates, or information relating to the private affairs of an individual the disclosure of which might significantly harm that individual’s interests.

Fees – The party instituting the arbitration is required to pay the arbitration fees in advance.  The general rule is that, at the time of making the award, these will be allocated 50/50 between the parties.   However, the arbitrator has a discretion as to the allocation of arbitration fees and, if he or she exercises that discretion, can also vary the general rule that each party will bear its own costs of the arbitration.

Choice of arbitrator – Under this type of arbitration, the parties do not have the ability to appoint a chosen individual as arbitrator.  Arbitrators are appointed by applying to one or other of seven arbitration bodies approved by the Secretary of State for Business, Energy and Industrial Strategy, amongst these bodies being the Chartered Institute of Arbitrators and the Royal Institute of Chartered Surveyors.

These bodies, supervised by the Secretary of State, may in a particular case appoint a single arbitrator or a panel of arbitrators, who must as usual act impartially and independently from the parties.  Arbitrators must also be qualified to conduct the arbitration and must in fact conduct the arbitration in a proper manner.

For further information, please contact Michael Higgins, Wendy Miles, Chris Earl or William Sturge at Lovetts

6 May 2022