Government publishes details of Covid Rent Arrears Scheme under the Commercial Rent (Coronavirus) Bill (the “Bill”) and a new Code of Practice

The Bill sets out the legislation which the Government plans to introduce to assist Landlords and Tenants to resolve their Coronavirus related rent arrears. Details of the proposed arbitration scheme have also been set out.

In brief, the proposed arbitration process will deal with any business tenancy rent arrears, including service charges and interest, which arose during the period beginning on 21 March 2020 and ending on the date that restrictions applicable to any particular business came to an end.  Given that all such restrictions were removed on 18 July 2021, that is the last date upon which the ring fenced period can come to an end although if restrictions in relation to a business were lifted before then it will be the date of lifting of those restrictions which will apply.

The Bill introduces the concept of “financially viable businesses” and will be available to Landlords and Tenants who have not entered into voluntary arrangements over coronavirus related rent arrears.

The Government has outlined the process which it anticipates will apply and each stage can be summarised as follows:

1. Pre Application letter of notification. The Landlord or Tenant must notify the other party that they intend to pursue binding arbitration.  That notification must include a proposal for settlement of the rent arrears.  The other party may respond within 14 days and can accept the proposal or submit their own proposals.  The Bill requires the parties to provide evidence of financial viability with their proposals.

2. Arbitration. Either party can apply for arbitration on payment of the necessary fee. It is likely that the fee will be on a sliding scale relative to the rent arrears. The parties will have 6 months from the date the Bill comes into force to make their Application once the initial Application has been made the other party has 14 days to respond with their own proposal which must be supported by evidence.

3. Hearing stage. The Application can be dealt with either by a public Hearing or on paper. The Bill expects the arbitrator to conduct the Hearing within 14 days of the receipt of a request for an oral hearing and should limit the Hearing to 6 hours or less.

The Bill anticipates notification of the outcome of the Hearing within 14 days. The decision will be legally binding on the parties. The arbitrator can also determine who should pay the costs of the process.

4. Principles on which the Arbitrator’s Award should be based. The purpose of the Bill is to protect financially viable businesses from closure caused by covid related rent arrears.  However, the starting point is that tenant is expected to pay the rent in full.  Where it can be shown that the Tenant is viable, but for the Covid related arrears, the Bill would permit the arbitrator to discount the arrears by up to 100% or allow for payment of the arrears by instalments over up to 24 months. The tenant will be expected to balance the financial positions of the Tenant and the Landlord and can take into account factors such as previous rental payments made and the relative financial strength of each party. A tenant who regularly missed rent payments before or after the pandemic may struggle to persuade the arbitrator that they are financially viable.

5. Concerns. Whilst the relatively short timeframe for an arbitration is to be welcomed, it is not clear whether sufficient resource will be available to deal with such claims once the Bill is passed.  That may impact on the effectiveness of the scheme. There will be a relatively narrow window of only 6 months to pursue the arbitration.  Prior to doing so, the referring party will have to have their financial information available to share with the other side and the arbitrator.

Landlords will be concerned about the prospect of protected arrears being heavily discounted and/or being paid over a relatively long period of time, especially in the context of what may only be a 5 year tenancy.

 

Any process which involves a third party making a decision necessarily involves uncertainty and Landlords and Tenants would be best advised to engage with each other as soon as possible to seek to deal with Covid related rent arrears by agreement.  With the current restrictions on Landlords pursuing Covid related arrears, there is concern that a Tenant may utilise the process to significantly delay the point at which they have to pay arrears. A Landlord faced with such a Tenant would no doubt wish to initiate the process as soon as possible, but with an eye on the costs of the process, both sides should keep a careful record of their attempts to engage with the other to seek agreement, rather than simply waiting to refer the matter to arbitration.

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