Mandatory arbitration process unveiled for commercial rent arrears
Andrew Flagg is a Partner in the Litigation Department and can be contacted on 01323 434416 or afl@stephenrimmer.com
Commercial rent arrears post pandemic
The government has unveiled its long-awaited plans for arbitration to handle pandemic-related commercial rent arrears, with a code of conduct that effectively sets the standard for the draft legislation, which is expected to follow through next year.
To protect businesses forced to close during the pandemic, the government imposed a moratorium on commercial landlords evicting tenants who were unable to pay their rent. Alongside, restrictions stopped landlords seizing goods in lieu of rent, and businesses in rent arrears were protected from insolvency proceedings by their landlord.
When did the new Code of Conduct come into effect?
The new code of conduct came into effect on 9 November 2021 and applies to all commercial leases held by businesses with rent arrears caused by the impact of the pandemic within a ring-fenced period and applies across the United Kingdom.
"This is all focused on supporting the wider economy by encouraging landlords to look at the longer-term benefits. The key takeaway is that landlords are being encouraged to reach a negotiated settlement, rather than issue proceedings, if that will help protect the viability of the tenant's business," said Andrew Flagg, Property Litigation specialist at Stephen Rimmer Solicitors.
"But this isn't a blank cheque for tenants wanting to withhold rent on commercial premises: if they are able to pay, they are expected to do so. Also, it relates to specific ring-fenced periods and sectors. Where a business was able to continue trading, such as pharmacies, they will not be covered by the proposed legislation, although each situation will be judged on a business-by-business basis, as not all tenants will fit neatly into the sector-related time restrictions outlined in the code."
When does arbitration apply?
Arbitration will apply only to arrears which relate to periods of mandated closure, meaning that where there has been any gap in payment it is important that landlord and tenant are clear about the period that any subsequent rental payment relates to. If a date within the ring-fenced period is not specified for any such payment, then it will be treated as outside the scope of the arbitration process. However, the government is encouraging use of the code by landlords in resolving all rent arrears, whether or not they fall inside the scope for arbitration, rather than by issuing proceedings.
And because the aim is to avoid landlords pursuing tenants through the courts, the draft legislation provides a number of roadblocks on debt claims and petitions for bankruptcy. These include arbitration of any county or high court judgements issued from 10 November 2021 until the bill comes into force, so judgments made in that time for ringfenced debt could subsequently be cancelled by an arbitration award. The draft also prevents landlords from petitioning for bankruptcy of a business tenant in relation to any ring-fenced debt in the same period.
When does protection from eviction end?
The Commercial Rent (Coronavirus) Bill will formalise the code of conduct by setting out a binding arbitration process for rent arrears accrued during the pandemic where tenants are unable to reach a negotiated agreement with the landlord. To allow time for the legislation to be introduced, protection from eviction for commercial rent arrears will remain in place until 25 March 2022.