How Will Commercial Tenants Be Affected By The Covid Rental Arbitration Scheme?

During the height of the pandemic, enforced closures and social distancing measures hit the commercial letting sector hard, with the government itself estimating that £9 billion in rental arrears is still outstanding as of March 2022. 

In a bid to protect tenants and landlords from the risk of their businesses collapsing, legislation was implemented whilst restrictions were in place, but the recent removal of existing Coronavirus limitations has paved the way for a revised strategy. The Commercial Rent (Coronavirus) Act 2022 bought with it a new rental arrears arbitration scheme designed to resolve commercial property debt disputes arising from the pandemic. But how will the scheme work, and how will it benefit the many tenants who are still battling to keep their businesses afloat in a post COVID world?

What was the legislation imposed in 2020?

Under the original Coronavirus Act 2020, landlords were given reduced options to recoup rental. For example, the right to forfeit a commercial lease on the grounds of non-payment of rent was suspended, as was the utilising Commercial Rent Arrears Recovery (CRAR).

Not only this, but the use of statutory demands in pursuit of unpaid debt triggered by the pandemic was suspended, preventing landlords from pursuing tenants that hadn’t paid within a 21-day deadline with a petition to have the tenant’s business wound up. 

The corresponding Code of Practice, published in June 2020, urged landlords to engage in more practical ways of resolving their issues:

• Agreeing a full or partial rent-free period;
• Deferring rent for one or multiple payment periods;
• Rents being paid over shorter payment periods (e.g. monthly rather than quarterly);
• Varying rents to reduce ongoing payments to a current market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site; and
• Landlords drawing from rent deposits on the understanding that they cannot then demand that the deposits are “topped up” by the tenant before it’s realistic to do so.

At what point does the Commercial Rental (Coronavirus) Act 2022 come into play?

The Act only applies to those operating under a business tenancy who were mandated to close their businesses during the pandemic, be that entirely or partially. It decrees that if a mutually agreeable resolution about pandemic arrears cannot be reached, both parties will each have the right to apply for binding arbitration at any point during the six months following the Act being passed. The Act will cover all business debts accrued by the tenant during the protected period of 21 March 2020 to 18 July 2021, covering not just rent but also any service charges, insurance, interest due and VAT charged. 

What process will arbitration follow?

If a business is pursuing binding arbitration then, before making an application, it should formally notify the other party of its intentions. Accompanied by a detailed settlement proposal and backed with financial evidence, the notification is sent to the recipient who must then either accept the proposal or submit a counterproposal within two weeks. 

The arbitrator will have the power to either defer, impose an instalment plan or completely write off arrears if necessary, so long as it can be proved that business would have been financially viable if it wasn’t for the pandemic. However, it’s important to note that the tenant is still expected to meet all contractual obligations wherever possible and that facilitating the continued operation of an otherwise viable business is the only situation whereby the arbitrator will impose a reduction in arrears. Other factors that the arbitrator will consider during their appraisal will include the total assets and liabilities of the tenant, incorporating all other tenancies, and their payment track record. 

How will arbitration help to resolve disputes?

The message from the Government is clear – the arbitration process is to be used as a backstop, with tenants and landlords negotiating their own agreement as the priority. This message has statutory backing as the Act states that it will be possible for parties to continue to negotiate outside of the arbitration process and that agreements reached (in respect of ring-fenced arrears or any other matter relating to the tenancy) will be enforceable regardless of the availability of the arbitration process. 

The pandemic created a purely artificial situation for tenants where they might be lured into a false sense of security. But the protective legislation has now ended, and landlords are free to pursue unpaid rent using all of the remedies usually available, so tenants should be wary.

The key expectation is that both parties will act ‘reasonably’. If the arbitrator feels that a tenant is being unreasonable in their demand, such as asking for an unwarranted reduction or write-off, then the arbitrator could be left questioning the long-term viability of the business. And because this is the keystone around which the whole of the arbitration edifice is constructed, that could be disastrous.

About the authors: 

Karen Mason is a highly experienced property lawyer and co-founder of Newmanor Law. She has worked for a variety of commercial clients investing and dealing with property, including landlords and tenants in a variety of sectors.

Alex Pelopidas is a finance specialist with over ten years of experience in real estate finance transactions. He has a broad practice involving loan origination, restructuring, and enforcement working with a variety of lenders, borrowers, investors and property professionals.