Government adds detail to proposed ringfencing and arbitration regime for commercial tenants in arrears in England

Landlords and tenants of commercial property in England are assessing newly-published details for the proposed new ringfencing and arbitration procedure to apply where tenants owe arrears of rent that built up during the COVID-19 pandemic.

The government has now published a draft Bill and an accompanying Code of Practice, which set out in detail the new laws that will apply. These require landlords to make allowance for such arrears, and share their impact with the tenant – for example, by making an agreement with their tenant to waive part of the amount owing, or accepting a long-term repayment schedule.

If they fail to reach such an agreement, an automatic, legally binding arbitration procedure applies, presided over by arbitrators from a government approved arbitration body(ies).

Key points include the following:

• The new laws will only apply to tenants whose businesses or property were legally required to close in full or in part under the COVID restrictions.
• They will apply to arrears of rent which fell due from 21 March 2021 and ending when the COVID restrictions applicable to the particular tenant's industry sector were fully removed. The protected period could therefore include times when the tenant was able to carry on limited trade, because only partial restrictions were in force. For example, for nightclubs and hospitality in England, the period could last until 18 July 2021.
• 'Rent' includes service charges, insurance rent and interest for late payment.
• If rent has already been paid and/or the landlord and tenant have already reached a legally binding agreement about its payment, the new rules do not apply – tenants cannot use the new rules to re-open negotiations.

Once the Bill becomes law, a landlord or tenant will have six months to refer their dispute to arbitration. If that deadline is missed, the landlord's usual remedies are resurrected, such as suing for rent, forfeiture, winding up petitions and using the Commercial Rent Arrears Recovery process.

Within that six months, the landlord and tenant must first have gone through a 28-day (or thereabouts) process of exchanging their respective proposals (with supporting information) as to how much and/or when arrears should be paid, with a view to reaching an agreement. This process should therefore be started sufficiently early so, if it fails, there is still time to initiate arbitration within the six-month period.

Until the end of the six-month period landlords are restricted from issuing a money claim in the courts to recover their rent arrears.

To counter the risk that landlords flood the courts with money claims before the changes come into force, the new laws will say that any such claims issued on or after 10 November 2021 (the first date landlords became aware of the new laws) and that cover rent arrears accrued during the period of restrictions will be stayed and not allowed to proceed. Note, however, that the new laws do not apply where a landlord issued a money claim before 10 November 2021. Additionally, this does not prevent landlords from issuing money claims for any arrears which were accrued outside the period of restrictions and against those tenants who were not legally required to close their business.

If a matter goes to arbitration, the arbitrator's decision must take into account the factors in the new Code of Practice – such as the effect of any decision on the tenant's viability, and whether any reduction in the arrears payable will jeopardise the landlord's solvency. Subject to that, the arbitrator has extensive powers. For example, they may write off arrears, allow payment by instalments (up to a maximum of two years) and disapply interest payments.

The arbitrator will usually make their decision based on documents submitted, but either the landlord or tenant can ask for an oral hearing which the Code of Practice states should not last more than six hours. The hearing must be held within 14 days of the receipt of the request.

Most arbitrations should take only one to two months – partly because the arbitrator will work within the parameters set by the parties themselves in the proposals they each made during the 28-day process.

Commercial landlords should assess which arrears of rent owed to them are subject to the proposed new ringfencing and arbitration process, determine what outcome they want in relation to each relevant tenant, and gather the evidence that, under the new Code, will persuade the tenant or an arbitrator to agree to that outcome.

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