The Government published its draft Commercial Rent (Coronavirus) Bill on 11 November 2021. It is intended that the Bill is passed into Law by 25 March 2022, but this is subject to the approval of Parliament.
The Government also published a new Code of Conduct for Landlords and Tenants relating to Coronavirus Rent Debt. The main purpose of the Code and the Bill is to establish the binding Arbitration mechanism that allows Landlords and Tenants to deal with unpaid rent incurred during the Pandemic.
So, what does this mean for commercial Landlords? It will prevent a Landlord from using any recovery method to obtain payment of rent arrears including a County Court Judgement, CRAR, Re-Entry and Forfeiture and drawing down on any rent deposit.
So, what method can a commercial Landlord use to obtain payment of rent arrears? It is intended that those businesses that were forced to close during the Pandemic, fully or partially, will be able to ringfence rent arrears and that Landlords and Tenants will either have to reach an agreement on how this ringfenced rent debt is paid and, if it is not possible to do so, that the process and timing about payment of the rent arrears will be referred to the Arbitration process and the Arbitrator to make that decision on behalf of the Landlord and Tenant.
What Does the Commercial Rent (Coronavirus) Bill do?
There are two main functions of the Bill. The first is to introduce a system of binding Arbitration. The second is to introduce a moratorium on the use of certain remedies and measures that could otherwise be available to Landlords to collect payment of rent debt. It is the introduction of the Arbitration system and the removal of any other method available to commercial Landlords to obtain payment of rent arrears which will force Landlords and Tenants to refer rent arrears to Arbitration.
There is already a moratorium in place lasting until 22 March 2022. Details of the limitations currently placed on Landlords to recover rent debt is detailed here (hyperlink to the Article I have done for November).
The further moratorium period to be introduced by the Commercial Rent (Coronavirus) Bill from 25 March 2022 (or when the Bill is passed into Law) will operate until:
What Rent Arrears will be affected by the Commercial Rent (Coronavirus) Bill?
It will apply to rent, service charges (including insurance costs) and interest on rent and service charges incurred in the period 21 March 2020 up to 18 July 2021. This will be referred to as the “Protected Period”. Once passed into Law, a Landlord will not be able to exercise CRAR, issue a claim for a debt, issue a Winding Up Petition or Bankruptcy Petition, forfeit a Lease or use the rent deposit to obtain payment of the ringfenced rent debt.
Should Landlords Act Now Prior to the Commercial Rent (Coronavirus) Bill Becoming Law?
Landlords may be keen to act now in advance of this new moratorium and Arbitration process becoming Law. However, the Bill does have immediate implications for Landlords considering acting now.
The Commercial Rent (Coronavirus) Bill prevents action being taken by Landlords in advance of this Law being passed. In particular, the Bill makes the following provisions:
To What Tenancies Does New Commercial Rent (Coronavirus) Bill Apply to?
The new Bill, as with previous Coronavirus protections issued by the Government, will only apply to business tenancies.
In addition, new provisions will only apply where those business tenancies were operating in premises which were required by Government regulations to be closed, because of the Pandemic.
There may be many businesses that saw a downturn in trade and income because of the Pandemic, but unless they were required to close, those businesses will not benefit from the new Law to be introduced. Sectors which were required to close include hospitality and nightclubs, theatre and cinemas, personal care-based businesses, such as hairdressers and beauticians, and non-essential retail.
It is anticipated that where some businesses in the hospitality sector which were able to partially open, such as restaurants offering take away food, rather than a sit down dining experience, will still be able to benefit from the new Legislation and will still be regarded as a business that was required to be closed.
Businesses which followed the Government guidance and encouraged Employees to work from home will be outside of the scope for the new Legislation.
How Exactly Will the Arbitration Process Operate?
The exact way in which Arbitrators will determine disputes is not yet established. The options available to Arbitrators to dismiss a referral of a ringfenced debt to Arbitration also need scrutiny. Arbitrators will also have to decide whether a debt referred to the Arbitration process is a qualifying debt. A business needs to be financially viable to be able to use the Arbitration process. How an Arbitrator makes this key decision also needs to be outlined. It is anticipated that Arbitrators will assess whether, apart from the unpaid rent debt, the Tenant’s business would be viable from financial disclosure by the Tenant and will go beyond property considerations. How this assessment will be made will also differ from Arbitrator to Arbitrator. Significant scrutiny and clarity on these important aspects of the Arbitration process is required, prior to the Bill becoming Law.
An Arbitration Award made by an Arbitrator will be binding on Landlord and Tenant. An Arbitrator will need to publish the reasons for the decision made. As with any Court or Arbitration Process, different Arbitrators may reach different conclusions and it is not anticipated that awards made by one Arbitrator will act as an authority to bind other Arbitrators.The Pandemic has already affected businesses in way which were unforeseen and previously thriving businesses have seen a downturn in income and trade, because of changed behaviours, which are not related to property and rent issues.
The exact way in which Arbitration will work will need to be monitored.
A summary of the process to refer unpaid rent arrears under Business Tenancies can be found here.
We will continue to review the Commercial Rent (Coronavirus) Bill and the Code of Practice and any further clarity or direction provided by the Government regarding the Arbitration process.
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This article was written by Lisa Eastwood, Solicitor in the Residential Property Litigation Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of December 2021.