What do commercial landlords and tenants need to know about the Commercial Rent (Coronavirus) Bill and the new arbitration process?
The Commercial Rent (Coronavirus) Bill and accompanying Code of Practice was announced by Business Secretary Kwasi Kwarteng on 9 November 2021.
The Bill addresses Covid rent arrears and comes in the wake of the Autumn Budget, which provided measures of support for commercial landlords and tenants. Those measures included the freezing of the business rate multiplier for one more year and a 50% discount on business rates for the retail, hospitality and leisure sectors (up to a max. of £110,000).
This article follows our previous overview of the changes and looks at the Bill in a bit more depth, providing some extra legal insights into the changes and the arbitration process.
When will the Commercial Rent (Coronavirus) Bill come into effect?
The current government legislation protects commercial tenants from eviction, to prevent ‘forfeiture’ of leases resulting from rent arrears. These earlier measures are set to expire on 25 March 2022, when the new laws under the Commercial Rent (Coronavirus) Bill are set to come into force in England and Wales.
Arbitration
The Commercial Rent (Coronavirus) Bill includes a binding arbitration process.
Where landlords and tenants have failed to resolve a dispute over “protected rent” arears, either party can apply for arbitration (provided that the tenancy falls within the scope of the Bill). This is viewed as a ‘backstop’ where negotiation has failed. It will be legally binding between the parties, meaning that the result of the process must be adhered to.
If the arbitrator rules that the tenant’s business is viable – or would be if they were given relief from arrears – they may make an award which provides relief and time to pay. However, this would also preclude the tenant from proposing CVAs and other schemes for a period of time. If the opposite is true and a business is clearly failing, such that relief would not assist, they’d dismiss the referral. Indeed, directors of such businesses would be advised to seek the advice of an insolvency practitioner in this case.
Whilst the arbitration process is a useful addition, the government wants to encourage parties to reach their own agreement through negotiation instead of resorting to binding arbitration. The British Property Federation has suggested that in more than 80% of cases, landlords and tenants have reached an agreement on arrears and so it’s likely that arbitration will only become necessary in a minority of cases.
Do the proposed new laws apply to all arrears?
The Commercial Rent (Coronavirus) Bill covers “protected rents” which comprise the rent debts accrued by commercial tenants affected by Covid-19 business closures for the period 21 March 2020 until restrictions for their sector were removed.
Questions remain about the appropriate treatment of rent arrears which pre-date that period and the impact of those earlier arrears on the negotiation process.
Although it would appear that landlords could present a winding-up petition for these once the current protection ends, that would seem rather incongruous with the intention of the new provisions and we’d expect this to be considered ahead of the final draft.
Are all businesses within the scope of the Commercial Rent (Coronavirus) Bill?
As drafted, the Bill applies to tenants who lease their premises under a business tenancy and who were forced to close their premises or to cease trading as a result of Covid-19 measures.
Businesses which were permitted to remain open during the pandemic but made a decision to close for varying reasons (for example, to protect their employees and customers from the virus) would not fall within the scope for the arbitration process and it can be excepted that these businesses may feel at a disadvantage. The government has advised that, in this situation, landlords and tenants are encouraged to follow the Code of Practice to come to an agreement on outstanding rent arrears.
What if tenants have more than one lease with the same landlord?
Currently, it’s not clear whether this would be dealt with as a combined application or whether there would be multiple arbitrations. However, even if each one was to be dealt with separately, given that the awards will be published, it would seem unlikely that an arbitrator wouldn’t consider previous decisions.
Does an arbitrator’s award release third parties who have provided guarantees?
It’s not yet clear whether an arbitrator’s award would also protect against landlords’ claims against guarantors – either under the lease or under a separate authorised guarantee agreement. However, one would hope that where the tenant benefits from relief, this would also press pause on any such claim, and this will probably be made clear.
Code of Practice
The Code of Practice will replace the previous one for commercial property relationships, published in June 2020 and updated April 2021. It will apply to all commercial leases where there has been a build-up of rent arrears as a result of tenants being unable to pay due to the impact of the Coronavirus pandemic.
The aim of the Code is to assist commercial landlords and tenants who are in dispute over rent arrears resulting from the tenant having their business restricted or closed during the pandemic.
The Code provides the following:
- Guidance on the Commercial Rent (Coronavirus) Bill, in particular, a proposed binding arbitration process;
- Best practice for landlords and tenants who are outside of the scope for arbitration;
- Encouragement of good practice between the landlord and tenant, particularly when negotiating; and
- Principles that the landlord and tenant need to be guided by.
Final thoughts on the Commercial Rent (Coronavirus) Bill – and what to expect next
This draft legislation provides a clear message from the government to aim to conclude any disputes which remain between tenants and landlords by providing a proportionate solution as we return to normal commercial relations following the pandemic.
Importantly, the Bill still has to be passed through Parliament and, as result, changes may occur before it is finalised. It will be interesting to see the impact that it has on the market in due course. With the recent discovery of the new Omicron variant, this proposed solution might come during a continuing rather than an ending pandemic situation with future challenges of potential further lockdowns and restrictions on the horizon.
For more legal updates relating to the pandemic, please visit our Covid-19 info hub.