New Arbitration Scheme for Commercial Arrears goes live

The Commercial Rent (Coronavirus) Act 2022 (“the Act”) came into force on 24 March 2022.  Its passage through Parliament has been well documented since its introduction as a Bill in November 2021 and after much debate, the final text of the Act did not differ substantially from that introduced.

The Act introduces a new binding arbitration scheme for commercial arrears and now that the scheme is live, we have summarised below how the scheme is intended to operate and key points for landlords and tenants.

Following enactment of the Act, a revised Code of Practice was published to reflect the Act receiving Royal Assent. In addition, the Government published a final version of the statutory guidance for arbitrators together with a list of bodies who have been approved to act as arbitrators in these matters.

Revised Code of Practice

The revised code, published on 7 April 2022, replaces the previous code last updated in November 2021. It is mandatory for landlords and tenants where arrears fall within the scope of the arbitration scheme (see below) and also reflects expected practice of landlords and tenants where arrears fall outside of the scheme. It does not alter existing agreements for payment of arrears reached between landlords and tenants. 

The Act

The Act applies to business tenancies to which Part II of the Landlord and Tenant Act 1954 applies. It does not apply where the tenant is a head tenant so, only to those tenants who are in occupation of the premises.

The Act covers protected rent debt including arrears of rent, service charges, interest and VAT which have accrued during the protected period. The Act is triggered where the business carried on by the tenant from the premises or the premises themselves were subject to a forced closure during the Coronavirus pandemic.

The protected period varies depending on the nature of the tenant’s business. It will be a period between 21 March 2020 and 18 July 2021. The protected period ends with the last day on which tenant’s business/premises was subject to a closure requirement. For example, for non-essential retail, the protected period will be 21 March 2020 to 12 April 2021. If rent is payable quarterly, rent is to be apportioned up to the end of the protected period.

Where the Act applies, a temporary moratorium comes into effect until either the conclusion of the arbitration or 23 September 2022 (if neither party makes and application) and the following methods of enforcement are restricted against the tenant:

• Forfeiture for non-payment of rent.
• Exercising CRAR.
• Issuing Court proceedings for a money judgment or enforcing a Judgment for protected rent.
• Presenting a winding-up petition.
• Presenting a bankruptcy petition.
• Drawing down on a rent deposit or topping up a rent deposit.

The moratorium on debt claims and the presentation of winding-up or bankruptcy petitions also applies to a guarantor or former tenant in addition to the tenant themselves.

Arbitration Scheme

Either a landlord or a tenant can make a reference to the arbitration scheme by 23 September 2022 (unless that date is extended by further Regulations). No reference may be made if a tenant is subject to certain insolvency processes. 

There are 3 key stages involved in the arbitration process:

Stage 1: Pre-arbitration process

The referrer must notify the other party of their intention to refer a matter to an approved arbitration body accompanied by a final offer of settlement supported by evidence in accordance with the code. Within 14 days of receipt, the respondent may submit a response, accompanied by a counter-offer if the referrer’s offer is not acceptable. If the respondent submits a response, a reference to arbitration can be made after a further 14 days have elapsed. If the respondent does not respond, a reference can be made once 28 days have passed.

A reference is made by notice in writing to an approved arbitration body (the relevant body may have an application form) and the applicant must pay the arbitration fees in advance. The reference must contain the applicant’s formal proposal for resolving the matter. The respondent may, within 14 days, put forward its formal proposal. Both parties may then submit revised formal proposals accompanied by further supporting evidence within 28 days. 

The formal proposals are a critically important stage in the process as the arbitrator must consider any final proposals put forward by the parties in accordance with Section 15 of the Bill in determining relief from payment. It must determine whether one or both proposals are most consistent with the principles with Section 15. If only one proposal is consistent with the principles in Section 15, the arbitrator must make an award as set out in that proposal.

Landlords and tenants will be well advised to seek appropriate guidance from their professional advisers– both on compliance with the procedure and on the drafting of the proposals themselves. There is a danger in adopting an 'opening gambit' strategy, and a rushed proposal lacking in detail and unsupported by evidence is unlikely to be persuasive.

In appropriate cases, more than one arbitrator can be appointed, if the parties agree, to form a tribunal. This may be required where expertise is needed across a number of areas.

Stage 2: Eligibility criteria

The arbitrator will determine whether the dispute falls within the scope of the Act by considering whether the matter relates to a business tenancy and a protected rent debt and whether the parties have already reached an agreement in relation to the arrears. If there is a pre-existing agreement between the parties then the matter cannot be referred to arbitration and the arbitrator must dismiss a reference. The arbitrator must also consider the viability of the tenant’s business which will carried out on a case by case basis. 

Stage 3: Resolving the matter of relief from payment

Provided the dispute falls within the scope of the Act, the arbitrator will consider the viability of the tenant’s business ensuring the preservation of the landlord’s solvency in determining whether to award relief from payment. The powers available to the arbitrator include reducing the sum payable, providing for payment in instalments or making no award for relief from payment. Where instalments are awarded, the maximum period of instalments is 24 months.

It is at this stage that the arbitrator must consider the final proposal or proposals in accordance with Section 15 of the Act. This is why it is crucial that professional advice is obtained because where a final proposal is not consistent with the principles of Section 15 of the Act, the arbitrator must disregard it and make an award in terms of the other party’s final proposal (provided it complied with Section 15 of the Act). The arbitrator does not have discretion here so arbitrations will be won and lost on this point.

The Code contains a list of indicators and evidence for assessing the viability of the tenant’s business. This is not exhaustive but includes documents such as financial accounts, management accounts, full bank account information, profit forecasting, evidence of long-term contracts, cash flow forecasts, evidence of financial grants/loans. The statutory guidance contains a table of possible indicators and evidence. There may also be documentation which a landlord may wish to produce as evidence around the preservation of solvency, in appropriate cases.

Where there has been an oral hearing, an arbitrator must make an award within 14 days after the conclusion of the hearing (although there is an ability to extend this time period). Where there is no oral hearing (which is anticipated to be the majority of cases), the arbitrator must make an award as soon as reasonably practicable after the latest final proposal is received. 

There are also powers to exclude confidential information from an award, but importantly, the award itself will not be confidential.

The Arbitration Act 1996 applies to the arbitration proceedings as varied by the Act and an award can be enforced with leave of the Court.

Practicalities

Where landlords and tenants anticipate a reference to the arbitration scheme, it is recommended that:

1. They identify potential properties which fall within the scope of the Act, particularly where a landlord or tenant has a portfolio of properties (although there is no provision in the Act or the guidance for multiple properties to be referred to one arbitrator).
2. Gathering together and analysing relevant documentation regarding the viability of the tenant’s business and preservation of the landlord’s solvency.
3. Considering whether it is appropriate to appoint more than one arbitrator in more than one discipline.
4. Engaging professional advisers at an early stage to assist with the preparation of formal proposals.

The clock is now very much ticking as all references must be made by 23 September 2022. It is therefore important that landlords and tenants consider making references sooner rather than later, and ensure that they adhere to the tight timescales laid down in the process. 

It is also not too late for landlords and tenants to reach an agreement between themselves (if they do, it ought to be clearly set out in writing).

In the meantime, we are likely to see publication of the first arbitration awards over the next few months which will provide an indication of whether landlords and tenants have been able to reach agreement to avoid a reference to the scheme or whether the scheme is utilised in high volumes, as Parliament anticipated.

This insight is not a substitute for legal advice on the specific circumstances of your case.  Please contact David Haines, Laura Bushaway or your usual Charles Russell Speechlys contact, if you have any queries.