The Government has now published the Commercial Rent (Coronavirus) Bill (the “Bill”), which is due to come into force on 25 March 2022, and a new Code of Practice (the “Code”).
It will provide a route to arbitration when commercial landlords and tenants cannot reach agreement on rent arrears (“protected rent debt”) accrued where premises were forced to close (“protected period”) during the COVID-19 pandemic.
The intention being that the Bill, alongside the Code, will provide a binding resolution where the parties cannot reach agreement on payment. However, certain sectors such as offices and pharmacies will be outside the scope of the Bill.
As drafted, the Bill will impose a temporary moratorium on the enforcement of protected rent debts. As such, commercial landlords will be unable to make debt claims and counterclaims for protected rent debts from passage of the Bill to the end of any arbitration period. Claims can also be stayed where they have been made on or after 10 November 2021, up to 25 March 2022.
The moratorium applies to all amounts due under business tenancies, including service charges, insurance, interest, VAT and sums payable to top up rent deposits. It also provides for temporary restrictions on the availability of certain remedies and insolvency arrangements.
It applies only to: (a) tenancies where the premises were forced to close; and (b) sums which relate to a protected period.
Although the drafting of the Bill is a little unclear, it appears that the protected period is the period beginning on 21 March 2020 and ending on 18 July 2021 or, if earlier, the last day on which the business was required to close or subject to a specific coronavirus restriction.
A specific coronavirus restriction means the regulation of any aspect of the way the business, or a part of a business, was to be carried on at the premises. Although it is not defined, a regulation is likely to be construed as a mandatory requirement as opposed to a recommendation.
A point that has been raised is that the draft legislation does not appear to contemplate multiple protected periods. It has been suggested that tenants who were required to close on separate occasions can treat the whole of the period until the spring or summer of 2021 as a protected period.
Either the landlord or the tenant can refer a protected rent debt to arbitration within six months of the date that the Bill is enacted. There is a short pre-action procedure whereby the applicant party notifies the respondent, who may then submit a response.
Any referral to arbitration must also include a formal proposal for resolving the matter of relief from payment of a protected rent debt. The respondent may then submit a counter-proposal and evidence in support should be supplied in each case.
When an application for arbitration has been made, arbitrators must consider the principles set out in the Bill when making an award. Before they can make a decision, arbitrators must assess the viability of the tenant’s business and consider whether it would continue to be viable even with relief. If not, then the referral will be dismissed.
If the referral is accepted, the arbitrator’s award should seek to:
- preserve the viability of the tenant’s business if the business is viable when the referral to arbitration is made; or
- restore and preserve the viability of the tenant’s business if the business would become viable if relief were provided,
so far as is consistent with preserving the landlord’s solvency. Note the use of solvency as the measurement for landlords rather than viability.
The Bill also sets out factors for the assessment of viability and solvency. Arbitrators should:
- consider assets and liabilities, the impact of coronavirus on the businesses of the tenant and the landlord, and any other information deemed appropriate; and
- disregard the possibility of the tenant or the landlord borrowing money or restructuring their businesses. This disregard is worded in the future tense, and so query how the arbitrator will treat steps taken by the landlord or the tenant immediately prior to a referral to arbitration to restructure its business. We suspect anti-avoidance provisions will be inserted into the Bill or otherwise it will be interpreted in that manner.
The draft Bill is passing through Parliament and so there may be amendments before it is enacted. It is also worth noting that, as currently drafted, the Bill can apply to future lockdowns so it seems likely that this instrument will be used for any further interruptions to business tenancies caused by the coronavirus.
We will report further once more details come to light.
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