Since then the government has been wrestling with the problem of how to unwind the question of Covid arrears and balance the needs of both occupiers and their landlords.
The government has now published documents seeking to resolve this issue:
- a Code of practice for commercial property relationships following the COVID-19 pandemic ("the Code"); and
- draft legislation – the Commercial Rent (Coronavirus) Bill ("the Bill")
The Bill has passed through parliament and took effect on the 24th of March as the Commercial Rent (Coronavirus) Act 2022 ("the Act").
The basic principle is that Covid lockdown arrears for business premises will be 'ring-fenced' so landlord remedies continue to be suspended in respect of such debts. Landowners and occupiers are encouraged first to negotiate through the Code, and if unable to reach agreement to refer the matter to binding arbitration in accordance with the Act.
The Act constrains certain landlord remedies in respect of 'protected rent debt' (comprising unpaid annual rents, service charges, insurance rent) relating to a tenant who was 'Adversely affected by coronavirus' (i.e. was subject to a lockdown closure requirement for the period starting on 21 March 2020) until the parties have reached a settlement, or the timeframe for binding arbitration is over.
The ring fenced period is from 21 March 2020 until the last date operating restrictions were removed from the relevant sector – it is very important to remember that establishing this date is not straightforward, the Code contains useful Annexe A with timelines showing the differing periods.
There is a six month window from 25 March 2022 for parties to apply for arbitration, with a maximum time frame for repayment of 24 months.
The Act provides that the various Covid tenant protections will continue during the ring fenced period – the moratorium on forfeiture (as previously found in in the Coronavirus Act 2020), the prohibition on winding up petitions (as previously found in Schedule 10 to the Corporate Governance and Insolvency Act 2020), and the constraints on commercial rent arrears recovery (as previously found in the Taking Control of Goods (Amendment) (Coronavirus) Regulations 2021).
The Act allows debt claims from 10 November 2021 onward to be stayed on the application of one party and prevents proceedings being issued whilst arbitration is ongoing. This means that landlords taking pre-emptive or additional court action will not be at an advantage. There are also similar constraints on presenting bankruptcy petitions.
Additionally, landlords are prevented from using rent deposits to cover Covid era arrears, and where that has already happened then the obligation on the tenant to 'top up' a rent deposit is suspended.
Where a tenant has entered the binding arbitration system then it may not include ring-fenced debts in a CVA or other restructuring plan after the arbitrator is appointed and for a period of 12 months from the award.
Code of Practice
The Code was introduced in November 2021 and continues to apply - it aims to provide a process for parties to negotiate towards settling Covid arrears before the new arbitration process comes into force.
The Code replaces the existing Code of Practice for commercial property relationships published in June 2020 (updated in spring this year) and covers some 75 points.
Key items in the Code include:
- a statement that pre-existing arrangements as to arrears still should be honoured – so the new code should not be taken as an opportunity to renegotiate existing arrangements;
- a statement that payments for rents outside the ring-fenced period are to be treated as to cover such period as the tenant has specified (or in the absence of this it will be treated as being payment for rent outside the period within scope of arbitration);
- a useful overview of the Act and the binding arbitration process;
- provisions highlighting encouraging negotiation between the parties and an outline of the key behaviours comprising transparency, collaboration, a unified approach and reasonableness;
- a discussion of the key principles of 'viability' and 'affordability', in particular those set out at paragraph 50, as well as underpinning the Code these will be taken into account in the arbitration process:
'a. the aim is to preserve viable businesses
b. the preservation of the viability of the business of the tenant should not be at the expense of the solvency of the landlord
c. where it is affordable for a tenant to meet their obligations under the lease in full, they should do so without delay; any relief should be no greater than necessary for the tenant business to afford the payment.'
From 25 March 2022 the Act introduces a legally binding arbitration process for outstanding commercial lockdown arrears in England & Wales.
TThe arbitration process deals with premises which were required to close from March 2020 until the end of the restrictions relevant to their sector and will apply to commercial rent arrears for businesses required to close during the Covid crisis, but not to other arrears.
The Code contains Annexe A with timelines showing the differing periods, this provides a useful guide to complex web of secondary legislation creating the various different business closure regimes.
It should be noted that the process is intended a last resort which either party can seek unilaterally, negotiation outside the arbitration is permitted and indeed is encouraged in the Code.
The arbitration process comprises six stages involving notification of intention to pursue arbitration, with proposals and counterproposals from both sides and then an application for arbitration including evidence as to viability and affordability in the case of a tenant.
It will result in a legally binding agreement determined by an approved private arbitrator.
Annex C of the Code contains a useful flow chart illustrating the arbitration process in depth.
Applicability across the UK
The Code applies across the whole of the UK, including Scotland.
The Act applies to England & Wales, but does not apply in Scotland.
The Act contains provisions which give Northern Ireland a power to make similar legislation.
The arbitration scheme is very much intended as a last resort and that landlords and tenants should negotiate their own agreements where possible. Further guidance and a list of approved arbitrators will be published in due course - it is expected that the approved list of arbitrators will be financial (as opposed to property) experts. The arbitrators are allowed a relatively wide degree of discretion in determining the outcome of relief (if any) to be awarded to a tenant and who should bear the costs of the arbitration itself. The arbitrator is obliged to observe some key principles which are consistent with the Code – preserving tenant business viability so as far as that is consistent with preserving landlord solvency – essentially balancing the competing interests of landlord and tenant.
Any awards granted by the arbitrator must be published alongside the reasons for making such an award. Despite the publication of the awards and reasons, these will not create a precedent that will bind other arbitrators when considering separate references. It is therefore likely, due to the wide discretion afforded to the arbitrators, that we could see varied decisions on similar facts.
This development provides some clarity to both tenants and landlords. On the one hand, tenants will be able to take comfort that the ring-fenced arrears remain out of reach of landlords for the time being, ensuring business viability, whilst landlords will feel some relief that rents falling due beyond the protected period will be payable in full. DWF Law LLP have acted for both tenants and landlords throughout the pandemic. If these developments have or will have an impact upon you and/or your business, please do not hesitate to get in touch with us.