Lawbite: COVID commercial rent arrears – the £7 billion question

• United Kingdom

• Litigation and dispute management
• Real estate
• Real estate litigation - LawBite

30-09-2021

UK Government mandates arbitration for commercial rent arrears claim resolution

Over the summer the UK Government announced its proposed approach to commercial rent arrears incurred during the pandemic. 

In its Policy paper released 4 August 2021 the UK Government confirmed that legislation mandating arbitration for the resolution of disputes surrounding covid rent arrears should be in place this session, i.e. before the end of March 2022. The timings are intended to tie in with the lifting of some of the restrictions on landlord enforcement currently in place, such as the forfeiture moratorium. 

Before the legislation is released, however, the plan is to strengthen the Code of Practice for commercial property relationships during the COVID-19 pandemic (the Code of Practice”) which has been in place since June 2020 to incorporate within it the principles which both parties and the arbitrators must have regard to during negotiations and also during the arbitration itself. These principles will be enshrined in the new legislation and indications are that the draft legislation and updated Code of Practice will be released by early November this year.

The three key aspects of the approach: 1) ringfencing of arrears, 2) encouragement of negotiated settlement and 3) mandatory arbitration as a last resort.

Ringfencing arrears:

As soon as legislation is passed, the protective measures in place for commercial tenants will only apply to ringfenced arrears, being those accrued since March 2020  during period of closures caused by the pandemic.

Ringfencing will apply until restrictions are eased for the tenant’s sector. This means that the ringfenced period will be different depending on the sector the tenant is operating within. On the face of it, therefore, the approach is intended to benefit those sectors which, generally speaking, were hardest hit. Landlords will not be able to forfeit a lease for breach of payment of the ringfenced rent even after the forfeiture moratorium is lifted in 2022.

Rent that is not ringfenced will not be protected and will therefore be recoverable by landlords.

Negotiated agreement/settlement:

The Government highlights that disputes should, where possible, be resolved through negotiations with both parties acting in good faith.

This message is one often repeated by the Government throughout the pandemic. The restrictions on enforcement currently in place are in part there to provide tenants with some breathing space whilst negotiations are ongoing.

A non-exhaustive list of options for new arrangements that could be agreed was given in the Code of Practice and included full or partial waiver or deferral of all or part of the rent or lease payments.

Arbitration scheme:

The mandatory and binding arbitration scheme, a so called “last resort”, aims to provide an impartial and manageable process where a negotiated settlement cannot be achieved.

The expectation is that both parties will contribute to the cost of the arbitration but where a party is found not to have negotiated in good faith in the "spirit of the legislative principles" the arbitrators may be empowered to grant the costs of the arbitration as part of their decision.

Indications from Government are that the burden of proof will be on the tenant to demonstrate why they are seeking a rent concession with the presumption that, where they can afford to, they should pay in full. 

Once we have the principles in the updated Code of Conduct and draft Bill  then we can apply a more structured approach to how rent arrears claims are likely to be resolved in practice.

Key points:

• there is a key difference between the Code of Practice and what is to come in the legislation.  That is, that the code was, and is, voluntary in nature and doesn’t change the underlying legal relationship between landlord and tenant and any guarantor.  The legislation looks to change that, at least in terms of the ringfenced rent
• further developments are eagerly awaited, but landlords and tenants will be contemplating what they can do in the meantime
• landlords would in most instances be best advised to pursue any court claims for the arrears and not delay in enforcement.  We have seen recent court judgments where the courts have sided with landlords and enforced their rights to recover arrears, although one case is subject to an appeal at the Court of Appeal
• tenants, however, may have little incentive to pay where they expect their arrears to be captured by the ringfencing scheme.  Noting however, that the Government has been consistent in its message that those tenants who can pay should do so. It is likely that this message will form part of one of the principles of the new legislation
• insurers remain resistant to loss of rent claims by landlords and the legislation is expected to clarify whether landlords can claim on policies for loss of rents