Commercial Rent (Coronavirus) Bill: What Landlords & Tenants Need to Know About the New Arbitration Regime for Covid-related Rent Arrears

The UK Government published a revised Code of practice for commercial property relationships following the Covid-19 pandemic alongside a draft Commercial Rent (Coronavirus) Bill on 9 November 2021, which will create a binding arbitration regime in respect of Covid-related rent arrears. Moratorium measures will continue until the Bill has become law. 

Government Policy

• Tenants who are able to pay rent debt in full (while maintaining the viability of their business) should do so, regardless of whether their business was forced to close.
• Tenants who are unable to pay in full should, in the first instance, seek to negotiate with their landlord, in the expectation that the landlord will ‘share the burden’ by waiving some or all rent arrears where they are able to do so. The revised Code of Practice provides a framework for negotiation.
• If landlord and tenant remain unable to reach agreement, either party may seek to access the new arbitration regime (in respect of ‘protected rent debts’ within its scope).

Arbitration Regime

• Scope: The new regime will apply to rent arrears under business tenancies in respect of periods where (a) the business or premises were required to cease or restrict trading, (b) the tenant can prove it is otherwise viable but cannot afford to pay such rent arrears, and (c) the landlord and tenant have not already reached agreement in respect of the arrears. Debts accrued at other times will not be in scope. 
• Constraints: Landlords will be restricted from pursuing remedies in respect of protected rent debt. 
• Principles: Contractual commitments should be recognised as far as possible, while achieving a proportionate balance between the interests of landlords and tenants, based on core principles of viability and affordability. The arbitrator’s decision will be evidence-based and take various factors into account.
• Process: The presumption is this will be a document-only process, but the parties may request a formal hearing. 

Limitations on subsequent restructuring

Tenants that have entered the arbitration system may not include the ring-fenced rent debt in any CVA, restructuring plan or scheme of arrangement after an arbitrator is appointed and for a period of 12 months, beginning when the arbitration settlement is awarded.

Impact

Agreement has been reached on the treatment of Covid-19-related UK rent arrears in the vast majority of cases — more than 80% — since the start of the pandemic.¹ However, significant rent debt remains unresolved. 

The scope of the arbitration regime is fairly narrow:

• The regime is clearly intended as a ‘last resort’.
• Tenants will be expected to pay full rent in respect of periods where they were not required to close or restrict trading.
• Even in respect of ring-fenced periods, tenants will be expected to pay full rent if they can afford to do so without affecting their viability.
• Tenants will be ineligible for the arbitration regime if they would not be viable even with a possible full write-off of rent arrears.

Timing

The draft legislation will now pass through Parliament over the next few months, with effectiveness anticipated from 25 March 2022, triggering a six-month ‘application window’. 

As ever, the draft Bill remains subject to change throughout the Parliamentary process.

For full details, read our Alert.