Policy background
- COVID-19 and the associated closure measures have had a significant impact on the economy, particularly on the income of the hospitality, leisure and retail sectors. As a result of restrictions on businesses during the pandemic and the temporary protections put in place to help businesses manage rents during coronavirus related restrictions, a significant amount of rent debt has built up relating to commercial tenancies.
- The Government worked with business leaders to publish a voluntary Code of Practice in June 2020 that encouraged both landlords and tenants to work together to resolve unpaid rent, and updated the Code in November 2020 and April 2021.
- Some tenants and landlords have utilised the voluntary Code of Practice and whilst there is indication that, overall, rent collection is increasing, it remains below average levels, especially in certain sectors.
- This legislation supports landlords and tenants, who cannot otherwise agree, in resolving disputes relating to the rent owed, to facilitate a return to normal market operation.
Business Protection Measures
- In 2020, the Government introduced measures to help businesses who were unable to pay their rent due to the impact of coronavirus. These were a moratorium on forfeiture (which prevents landlords from evicting business tenants on the basis of unpaid rent), a restriction on landlords’ abilities to seize goods to recover unpaid rent, and restrictions on the use of winding-up petitions and statutory demands (which have applied to and beyond commercial landlords and tenants). These measures were introduced to offer temporary relief, although the periods for which they applied were extended as restrictions continued.
Call for Evidence
- A Call for Evidence was published in April 2021 following the extension of government measures that had been introduced over the pandemic to protect businesses against the economic shocks of Coronavirus-related restrictions.
- The Call for Evidence gathered data on the state of negotiations between commercial landlords and tenants regarding these outstanding rent arrears, as well as ongoing lease terms. The Call for Evidence also sought views from interested parties on six options: one to allow the current measures to lapse on 30 June 2021 and five options to manage the exit from the current measures, including the option to ringfence rent debt and introduce a backstop of binding arbitration (which was the preferred option, particularly favoured by tenants).
- Out of the respondents to the Call for Evidence, the total rent that tenants claimed to owe was over £570m, while the total rent that landlords claimed they were owed was over £1.7bn. Both landlord and tenant stakeholders agreed that the voluntary nature of the Code of Practice meant it was less effective, and 49.2% of respondents were in favour of binding adjudication, whilst only 27.4% were against it.
Arbitration
- The Act provides certainty to both tenants and landlords by setting out a process for resolution, where agreement has not been reached, of rent accrued during the period of closure measures. The Secretary of State approves suitable arbitration bodies, which will in turn maintain a list of suitably qualified and independent arbitrators and administer arbitrations, to which either the landlord or tenant can apply. A statutory arbitration process is then applied, making provision for tenant and landlord to state their case, for types of award the arbitrator can give and the principles that govern this award.
- The Act provides that arbitration will be available in respect of business tenancies where the business tenant was required by COVID-19 related regulations, to close its premises or business in whole or part. For all tenancies affected by COVID-19, the parties are free to reach agreement and the Act will have no effect on those agreements. For those tenancies within the scope of the Act, failing agreement, either party can apply for arbitration. If the arbitrator decides that there is unpaid rent for the protected period and that the tenant’s business is viable or would be a viable business but for the protected rent debt, then the arbitrator will consider the circumstances and the proposals of the parties and reach a decision. The arbitrator’s award may provide for some or all the ringfenced debt to be paid by instalments and/or to be reduced. The arbitrator’s award may also reduce any interest payable by the tenant under the terms of the tenancy.
- The arbitrator considers the proposals put forward by the parties against the statutory principles. Where only the proposal of one of the parties is consistent with the principles, the arbitrator must make the award in that proposal. Where the proposals of both parties are consistent with the principles, the arbitrator must adopt the one they consider is most consistent. Where neither party’s proposal is consistent, the arbitrator must make whatever award they consider is appropriate applying the principles. The principles encourage the resolution of these debts, ensuring that those with the means to pay protected rent debt while remaining viable will be required to do so. Preservation of the viability of the tenant needs to be consistent with preserving the solvency of the landlord, so a balance is achieved.
- The arbitration process incorporates and builds on provisions from the existing Arbitration Act 1996 and provides for an effective, streamlined process, compatible with the rights of the parties to a fair process.
Temporary moratorium on certain remedies and insolvency arrangements
- The Act establishes a system of resolving protected rent debt that considers the circumstances of tenants and landlords in the context of the pandemic.
- If landlords used other measures to recover protected rent debt, there would not be a genuine opportunity to use the Act’s system. Therefore, the Act introduces a moratorium on the use of certain remedies and measures whilst the application period for arbitration is open or arbitration under this legislation is in progress.
- During arbitration, certain remedies (including those restricted already) and measures are temporarily unavailable, to give priority to the arbitration process. In addition, where debt claims for or including protected rent debt have been started on or after 10 November 2021, they will be stayed if one of the parties applies for a stay and the claims are not concluded. Where a debt claim has been concluded before the Act was in force, the judgement debt may be subject to arbitration so far as it relates to protected rent debt. Bankruptcy petitions presented based on statutory demands or claims made on or after 10 November 2021 and resulting orders made are void.
Revised Code of Practice
- Ahead of the binding arbitration system under this Act, the Government published a revised Code of Practice on 9 November 2021, which provides guidance for negotiations between landlords and tenants, including those which fall outside the scope of this Act. This replaces the Code of Practice issued on 19 June 2020 and updated on 6 April 2021.
- The revised Code of Practice applies to all commercial leases held by businesses that have been seriously affected by the COVID-19 pandemic and supports negotiations between parties.
