The Arbitration process under the new Coronavirus debt legislation

The new Arbitration process will apply to unpaid rent arrears due under Business Tenancies within a ringfenced period. The ringfenced period will begin from 21 March 2020 and will end on the date that the restrictions were removed from the Business Tenants’ Sector, enabled it to re-commence trading.

This will be the earlier date of 18 July 2021 or a date on which the premises were able to re-commence trading and were not forced to close. These are specific to the sectors affected, which are published in the new Code of Practice.

The Arbitration process will apply to ringfenced debt for a period of approximately 16 months, or slightly longer. The Arbitration process will only be available for Tenants for this ringfenced period and for whose businesses are considered financially viable, and only if they were required to close by Government regulations.

The new Arbitration process will not apply to Tenants who have already entered into a company voluntary arrangement with creditors in respect of rent arrears, or where Schemes of Arrangement or Voluntary Rent Settlements have already been negotiated between Landlord and Tenant.

Exact details of how an Arbitrator will determine whether a Tenant’s business is financially viable could be critical.

It is intended that the Arbitration process should not be lengthy or prolonged and should be used as a last resort. Whilst Tenants may consider that the Arbitration process may offer further time and scope for relief from the immediacy of having to pay rent arrears at the end of the current moratorium on 21 March 2022, it is not anticipated that all referrals made to the Arbitrator will be eligible and the factors of the Tenant’s solvency and viability of its business will be key considerations.

The Process of Referring Rent Arrears to ArbitrationPre-Application Letter of Notification

Either the Landlord or Tenant can refer the rent arrears to Arbitration. Either party must notify the other of their intention to pursue a binding Arbitration. The Letter of Notification must contain a proposal for settlement of the rent arrears. The other party may respond within 14 days, either to accept proposals or submit a counterproposal. All proposals, and counterproposals, need to be supported with financial evidence of viability relating to the Tenant’s business and affordability. The proposals must adhere to the behaviours and principles set out in the new Code of Conduct issued by the Government.

Application Stage

The Application for Arbitration is regarded as a last resort. It is anticipated that the process of making proposals and counterproposals will result in agreed payment arrangements. Either party can make an application for Arbitration.

The application for Arbitration should be made with a copy of the proposal and supporting evidence.

The application must be made within 6 months of the Legislation coming into force. At this stage, it is anticipated that the Legislation will come into force on 25 March 2022 and, if so, all applications for Arbitration will have to be made on or before 25 September 2022.

The party making the application will be expected to pay a fee for the referral. Fees have not yet been determined but are expected to be relative to the size of the debt owed.

The other party, who has not made the application to Arbitration, will have the opportunity to submit their own proposal together with supporting evidence within 14 days of the application being made. Both the party who is making the application and the party responding will have the opportunity to make revised proposals in respect of what the Arbitrators award should be.

This may be crucial, as the Arbitrator will have the power to make an award of costs, depending upon the Arbitration decision made and this facility to make revised proposals by either party, it is intended to encourage negotiation and agreement.

Hearing Stage

The parties have the choice of a public and oral Hearing before the Arbitrator or before the matter to be determined on the document provided.

It is intended that any Hearing of an Arbitration should take place within 14 days from the request for a Hearing.

An Arbitrator will make their decision based upon written evidence and any further evidence provided during a Hearing. The Public Hearing should not last more than six hours.

The Arbitrator will need to assess the financial viability of the Tenant’s business. The Arbitrator will have the power to defer, or write off, arrears. The Arbitrator must assess the proposals for the payment of rent arrears against the principle that rent debt accrued as a result of the COVID-19 Pandemic, should not force a business that would otherwise be financially viable to close. The Arbitrator also has the power to apportion the costs of the process of the referral of the rent debt to arbitration between Landlord and Tenant.

Factors that an Arbitrator must take into consideration when making the Arbitrator’s award from the Code of Practice issued by the Government in 2020 and the new Code of Conduct

The message from the Government is clear and consistent that Tenants are expected to meet their contractual liabilities under their Lease in full. Where a Tenant’s business would be viable, but for the ringfenced arrears during the Protected Period from 21 March 2020 up to or after 18 July 2021 (depending upon when the Tenant’s business sector was able to recommence trading), the Arbitrator may reduce the Tenant’s liability to pay the rent arrears in full, or partially, and provide payment by instalment options. Instalments should normally be paid in full within 24 months of the Arbitration Award.

Arbitrators must have regard to business Tenant’s assets and liabilities in addition to the impact of the Coronavirus Pandemic on the Tenant’s trade and any other information relevant to the Tenant’s financial position. There will be an onus on the Tenant to disclose this financial information for consideration by the Arbitrator to make a full assessment of the viability of the Tenant’s business. The Arbitrator must also have regard to the solvency of the Landlord and the Landlord’s assets and liabilities including other properties and Tenancies, to which the Landlord may be a party. Again, the Landlord should disclose information relevant to its financial position to enable the Arbitrator to have a full picture of both the Tenant and Landlord’s financial position.

Why is the Arbitration Process Necessary?

The Government has encouraged Landlords and Tenants to work together to reach acceptable solutions for both Landlord and Tenant, because of the financial difficulties forced by the COVID-19 Pandemic. This has been the Government’s consistent approach from the outset of the situation. However, there are Landlords and Tenants who have not been able to reach agreement between themselves. It is intended that the binding Arbitration process will provide a relatively quick and effective mechanism, whereby Landlords and Tenants have the issue of rent arrears determined, in a cost and time proportionate way.

The Government estimates there are more than 200,000 Tenant Businesses which have deferred or unpaid rent of approximately £1.5billion sterling. The Government considers that it is necessary to introduce this Arbitration process to protect businesses from insolvency, and, by doing so, to have a more positive economic impact. Even though it is intended that the Arbitration process will be time and cost efficient, it will require Landlords and Tenants to spend time and incur legal costs to deal with the Arbitration process. Whilst this intervention is intended to assist Landlords and Tenants, there may be a natural incentive on Landlords and Tenants to take more seriously proposals and negotiations to conclude arrangements so as to avoid the process of Arbitration.

For more information

Pinney Talfourd are experts in commercial and residential property litigation and can advise you on changes to the law so you are given up to date advice.

Please do not hesitate to contact either Stephen Eccles on 01708 463202 or Lisa Eastwood on 01708 5110000 should you wish to discuss anything further.     

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.