The government has published a draft bill to deal with unpaid rent arrears that arose during the pandemic. Landlords and tenants that have been unable to reach agreement on rent arrears accrued during the pandemic, facing a binding arbitration process.
A new code of practice
In advance of the new legislation coming into force by the 22nd March 2022, a new Commercial rents Code of Practice has been also introduced with immediate effect from 9th November 2021. This establishes a process for settling outstanding debts as well as a framework for any future arbitrations.
From the available details, it is clear that the government’s intention is for landlords and tenants to resolve disputes prior to the Bill becoming legislation.
The New Bill
The Bill applies to “ring fenced” rent arrears. These are arrears accrued by tenants who occupied premises under a business tenancy and were mandated to close their premises or cease trading during the specified period from 21 March 2020 to until the last date the restrictions were removed from the relevant business sector. These ring fenced amounts comprises service charges and insurance, as well as interest and VAT, in addition to rent.
Only those rent arrears that specifically relate to the ring fenced period are capable of being referred to arbitration. Any subsequent arrears accrued since restrictions were removed under the same lease will not come under the new Bill.
Where debt claims in the County Court or High Court have been issued between 10 November 2021 and the date that the Bill becomes an Act, they can be stayed if applied for by one of the parties. No new claims can be issued from the date the Bill becomes an Act.
Commercial rent arrears accrued during periods when a business was not forced to close are not captured within the scope of the draft bill and remain payable in full.
Any debt proceedings may be considered in any future arbitration under the proposed legislation.
The Arbitration process overview from the Bill
The arbitration scheme as outlined in the draft Bill will attempt the difficult task of balancing the competing commercial interests of landlords and tenants. Arbitrators are will have discretion to reduce the amount of the rent payable based upon factors such the viability of the tenant’s business and the landlord’s solvency, requiring analysis of each parties financial position.
The process will begin when a landlord or tenant intends to pursue binding arbitration and serves a pre-application letter of notification within six months of the Bill being passed as an Act. The application must contain a proposal for resolution and supporting evidence.
Parties will have the opportunity to submit counter-proposals within a certain timeframe before arbitration commences at a hearing or on the papers.
The arbitrator will consider its decision based on the written evidence or hearing and notify parties of the award. This will be legally binding with very limited grounds for appeal under the Arbitration Act 1996.
How current remedies are affected
Forfeiture
The moratorium on forfeiture of commercial leases and measures is due to end by 25 March 2022. Currently, a landlord is prevented from enforcing a right under the tenancy to forfeit for non-payment of the protected rent.
Once the Bill becomes law, landlords can expect to exercise their ordinary enforcement rights as before the moratorium in relation to non-payment of rent arrears incurred prior to March 2020 and from the end of the ring fenced period.
The key difference will be that if the action relates to any ring fenced debt, it will be within the scope of the binding arbitration process.
CRAR
Commercial Rent Arrears Recovery will remain suspended in relation to a protected rent debt during the moratorium period until 25 March 2022.
Insolvency
There are restrictions on the use of statutory demands by a landlord during the moratorium period in respect of a protected rent debt in connection with a bankruptcy petition.
Furthermore, a landlord cannot present a winding-up petition on the grounds that a company is unable to pay its rent debts during the moratorium period.
The Bill will prevent a landlord from petitioning for bankruptcy of a business tenant based on the non-payment of a statutory demand relating ring fenced debt served on or after 10 November 2021 and before the Bill comes into force.
Enforcement of judgments
The position on the enforcement of judgment debts obtained prior to 10 November 2021 through other means is uncertain with the current drafting.
Rent deposits
Under the Bill, landlords will be prevented from drawing down on tenancy deposits if they attempt to cover outstanding ring fenced rental arrears. If a landlord has already done this, then the requirement for the tenant to top up the deposit will be suspended under the draft legislation. The sum drawn down may be considered under any future arbitration.
Summary
Ultimately, the draft Bill appears to a major setback to Landlords attempting to recover full rent arrears. They face the prospect of the government retrospectively legislating to empower judges to look beyond the contractual terms of commercial leases.
Nonetheless, it must be remembered that the Bill is a ‘work in progress’. Landlords and tenants should expect further amendments to the Bill before it becomes legislation and we anticipate greater detail on certain points in the coming months.
CONTACT US
Whatever the nature of your property dispute call Ramsdens Solicitors for expert advice. Get in touch with us by calling 01484 821 500 or email info@ramsdens.co.uk to speak to one of our property dispute solicitors.
BY NICK ARMITAGE
November 24, 2021
Nick is a Solicitor and Partner and Heads our Commercial Dispute Resolution team.