The Arbitration Process within the Commercial Rent (Coronavirus) Act 2022
The act was initially a bill to make provision enabling relief from payment of certain rent debts under business tenancies, adversely affected by coronavirus to be available through arbitration. It was introduced in the House of Commons on 9th November 2021 and was granted Royal Assent on 24th March 2022, coming into force that day.
It introduces a binding arbitration scheme available to landlords and tenants unable to reach agreement on commercial rent debts built up during periods of coronavirus restrictions in England and Wales. Either party has six months to refer a dispute to arbitration, to be administered by Government-approved arbitration bodies. The purpose of this scheme is to determine whether or not tenants should be granted relief from certain Covid-19 rent arrears, and if so, what relief? A key consideration of the arbitration process will be balancing the tenant’s viability against the solvency of the landlord.
Prior to introduction of the bill and subsequent act, the Treasury initially estimated that the total amount of business rent arrears could be in the region of nine billion pounds by March 2022. It was also estimated that the scheme would have to administer around 7,500 cases. On 24th March 2022, Minister Paul Scully provided a statement revising the Government’s estimation to 2,800 cases – which suggests they are anticipating a significant proportion of eligible disputes will either be settled pre-arbitration or will not pass viability assessments.
Just touching onto some key definitions within the Act:
A business tenancy – is as defined by that in the Landlord and Tenant Act 1954, Part 2 – namely a tenancy comprised of a property which is or includes premises that are occupied by the tenant for business purposes, or business and other purposes.
Rent is defined as any monies owed to the Landlord in respect of rent amounts, any VAT applicable, service charges, insurance payments and any rental deposit top-ups due after deduction of non-protected rent debts. Any interest that has been accrued in respect of these amounts would also be included within the rent amount.
The moratorium period is the period of restricted landlord’s remedies for rent recovery from 24th March 2022 for 6 months or until the end of arbitration.
A protected rent debt is the rent due under a tenancy if the tenancy was adversely affected by coronavirus, where the business or premises was subjected to a mandated closure (in its whole or part) during the protected period.
The protected period is between 21st March 2020 and 18th July 2021 in England, and is extended to 7th August 2021 in Wales to reflect the extended mandated closures there.
During the 6 month moratorium period, landlords will still not have access to the usual remedies – issuing debt claims, drawing down on any rent deposits, use the commercial rent arrears recovery process or forfeit the lease. They cannot enforce money judgements that have already been obtained in respect of protected rent debts or appropriate rent payments in any way which prioritises protected rent debts over other rent debts. They cannot issue winding up or bankruptcy petitions, or institute any other tenant insolvency procedures. There are no restrictions on rents that are not protected, so these remedies are now once again available to landlords for unprotected debts.
If before the 24th March 2022, a landlord drew down an amount from a tenancy deposit to meet a protected rent debt, and the tenant has not made good any shortfall in the deposit, that rent is treated as unpaid, and the amount drawn down in respect of that debt is treated as a protected rent debt. This means that an arbitrator can consider and make an award about any part of a protected rent debt which the landlord has drawn down on the tenancy deposit to cover. Depending on the award, the tenant may be relieved from having to make good any shortfall in the deposit – this is because the Act treats making good the shortfall as paying, in respect of such rent. There is also a retrospective invalidation of bankruptcy orders – if a bankruptcy order has been made on or after 10th November 2021, but before 24th March 2022, and the order was not one the court would have made had the act been in force at the time, then the order is void.
The arbitration process can be divided into the following three stages;
Stage 1 is the pre-arbitration stage;
Stage 2 is the arbitrator’s assessment of whether the dispute is actually eligible for arbitration and then;
Stage 3 is the arbitrator’s assessment of the relief from payment.
To commence the pre-arbitration stage, the party making the application – whether that be landlord or tenant, must notify the other party in writing and allow the prescribed period of 14 days for a response. The aim of this stage is to give both parties the opportunity to negotiate and potentially avoid arbitration if the dispute can be settled.
It can be either the landlord or the tenant that refers the matter to arbitration. It is worth noting that a reference to arbitration cannot be made where the tenant is subject to a company voluntary arrangement, individual voluntary arrangement or any scheme of arrangement or restructuring plan sanctioned under sections 899 or 901F of the Companies Act 2006 which relates to the protected rent debt. It is also worth noting that is only the landlord or tenant who can make a reference to arbitration, it cannot be done by a guarantor of the lease. For a guarantor, their hands are unfortunately tied and they have to wait for the landlord and tenant to come to an agreement or initiate the process.
If this procedure has not been followed, then the arbitration body cannot accept the reference. The applicant must pay the arbitration fees in advance and their reference should include their formal proposal, which should be a best and final offer, along with the appropriate supporting evidence.
The parties are free to agree the number of arbitrators to form a tribunal and also whether there is to be a chairman. Obviously, the more arbitrators involved, the higher the fees. If the parties cannot reach an agreement, then the tribunal will consist of a sole arbitrator.
The government has published a list of arbitration bodies approved by the Secretary of State, which is as follows:
The Chartered Institute of Arbitrators (CIArb)
The Royal Institution of Chartered Surveyors (RICS)
Consumer Dispute Resolution
Falcon Chambers Arbitration
Dispute Resolution Ombudsman
The London Chamber of Arbitration and Mediation (LCAM)
The Consumer Code for Online Dispute Resolution (CCODR)
Each of the bodies had to demonstrate that they are suitably equipped to administer the scheme. They will have to maintain a list of available and suitable arbitrators and appoint those from the list to deal with cases. Landlords and tenants will be able to apply to the approved arbitration bodies for arbitration services.
The arbitrator should apply the following principles; that the award should be aimed at preserving or, restoring and preserving, the viability of the tenant’s business, so far that is consistent with preserving the landlord’s solvency. Also, that the tenant should, so far as with the first principle, be required to meet its obligations to pay the protected rent debt in full and without delay.
The aim of the process is to preserve the tenant’s viability whilst also preserving the landlord’s solvency. The arbitrator must determine if there is a protected rent debt, whether the tenant should in fact be given relief, and if so, what that relief is. Both parties may each submit one revised formal proposal with the appropriate supporting evidence. The arbitrator must make an award as per the final proposal that is the most consistent with the principles. If only one party makes a proposal and it is consistent with the principles, then the award must be as per the proposal. If neither party makes a proposal that is consistent with the principles, then the arbitrator must formulate their own award that they consider appropriate whilst applying the principles.
Arbitration concludes under the following three circumstances; firstly, when the proceedings are abandoned or withdrawn by the parties, which must be done by both parties in agreement, or if an award is made. Secondly, when the time period for appeal expires without an appeal being brought. This includes an award dismissing the reference or stating that no relief is to be given. The last circumstance is if an appeal is made, when that appeal is finally determined, abandoned or withdrawn.
Relief from payment can be any one or more of; writing off the debt in whole or part, giving the tenant time to pay the debt in whole or part, including by way of instalments, and reducing or writing off any interest payable by the tenant under the terms of the tenancy in relation to all or part of the debt.
As part of the process, the arbitrator must assess the tenant’s viability. If the business is viable, or would become viable if it was to be given any form of relief, then the arbitrator must determine whether the tenant should receive any relief.
A key question for consideration is whether, protected rent aside, does the tenant’s business have, or will in the foreseeable future have, the means and ability to meet its obligations and continue trading. This is done on a case-by-case basis and the arbitrator can consider the impact of the tenant’s other debts and wider financial situation. It is not the responsibility of the arbitrator to seek out this information, but rather the tenants to provide evidence to enable the arbitrator to determine their viability.
If a Landlord considers that their tenant being granted relief from payment would not pose a risk to their solvency then they do not need to provide evidence of said solvency. Parties can request further information from each other and can ask the arbitrator to make an order under Section 34 of the Arbitration Act 1996, if the other party is not forthcoming. If either party has done anything to manipulate their financial affairs, then the arbitrator must disregard this. The arbitrator should also disregard the possibility of either party borrowing money or restructuring.
The awards that an arbitrator can make at stage 3, are as follows; to give the tenant relief from payment or to state the tenant is to be given no relief from payment.Any time to pay agreements must be within 24 months beginning the day after the date of the award.
What options are available to landlords?
With regard to protected rent debts, the usual remedies are not available during the moratorium period. The options are:
1. Wait until the period has expired on 24th September 2022 and then commence the usual procedures – this could be extended.
2. Negotiate with the tenant on a without prejudice basis to find an amicable solution.
3. Waive any right to the protected rent debt and take action against the tenant in respect of un-protected rent debts in order to regain possession of the property.
They wish to recover the property for the purposes to sell or re-let (where a potential tenant is confirmed), a demand to recover non-protected rent debts could be made following which a winding-up order or possession proceedings for the property could be commenced.
This will recover the property but waive any right to recover the protected rent debt. This seems the most likely where landlords themselves are insolvent and an option which the relevant administrator/liquidator would look to utilise
4. Commence the arbitration process to prove the tenant either is viable and can therefore pay rent (potentially discounted) or that they are not viable and the arbitrator can dismiss the referral.
Once an award has been made, the moratorium period ends in respect of the particular tenancy and the remedies become available to the landlord again. If the reference is dismissed, the landlord can seek possession. If the tenant does not meet the required rental payments under the award and revised lease terms, the landlord can also seek possession.
Looking at arbitration fees and expenses, the party making the reference must pay the fees in advance, but then the arbitrator can make it part of the award that the other party pays an appropriate proportion of the fees. This can be a 50/50 split but the arbitrator can make whatever split they consider to be appropriate. For example, if one of the parties is not co-operative or makes the process more laborious then necessary, then the arbitrator can make it part of the award that they pay a higher proportion. The fees are to be set by the arbitration body but the Secretary of State has a power to cap them. If one of the parties requests an oral hearing, they must pay the fees for it in advance. If both request one, they are joint and severally liable. Each party must meet their own legal and other costs and there is no ability of either party to recover costs under lease terms.
In terms of further reading, we recommend taking a look at the code of practice and guidance for arbitrators, both available on the government website. They contain a lot of helpful information and resources to assist you with navigating this process.