Following up on September’s post, New Rent Debt Ring-Fencing Legislation, (which looked at the Government’s intention to set out legislation to deal with commercial rent arrears built up during the pandemic), this post looks at the Government’s much-anticipated draft Bill to address this issue.
The Bill (expected to come into force in England and Wales from 25 March 2022), introduces a binding arbitration procedure for landlords and tenants who cannot reach an agreement on how to deal with the rent arrears.
There has been lots of hype and commentary surrounding the Bill. This post sets out the key points from the Bill. Note that this is subject to change as the Bill progresses through Parliament.
Commercial landlords should be aware of the proposals as these are likely to impact negotiations with a tenant and what enforcement action a commercial landlord may consider in the future.
The Arbitration Procedure
1. Once the Bill becomes law, there will be a six-month window within which either party can refer the matter to arbitration.
2. One party states their intention to refer the matter for arbitration to the other (which is to be supported by a proposal for how to resolve the debt). The corresponding party then has 14 days to respond. Upon receipt of a response (or at the end of 28 days from notifying the respondent), the first party may refer the matter for arbitration which must be accompanied by a formal proposal for how to resolve the debt.
3. The arbitrator will consider the matter and make a binding award which may:
– Write off the whole or part of the debt;
– Give the tenant time to pay (up to a period of 24 months from the date of the award);
– Allow the tenant to pay by instalments; and/or
– Reduce the interest which has accrued, or which may be written off.
4. The arbitrator may dismiss the referral if the tenant’s business is not viable (or would not be viable even if an award were made), or the debt in question is not a ‘protected rent debt.’
5. In making the award, an arbitrator is required to follow certain principles and may consider certain factors which are set out in further detail in the new Code of Practice (which is discussed below).
6. The arbitrator must make their award within 14 days of a hearing, or as soon as reasonably practicable.
7. Each party must incur their own legal fees. The initiating party must pay the arbitrator’s fees, but once an award is made, the cost may be split between the parties unless decided otherwise by the arbitrator.
Protected Rent Debts
1. A matter can only be referred to arbitration if it relates to a ‘protected rent debt’, which means the debts arose because of the closure of and/or severe restrictions placed on businesses during the pandemic.
2. The period of closure starts from 21 March 2020 and ends on the earlier of:
a. 18 July 2021 (England) and 07 August 2021; or
b. The last day on which the relevant business was subject to restrictions (these are set out in the new Code of Practice). Periods in between where businesses were allowed to trade are to be included.
3. Principal rent, interest, service charge, and VAT can be protected rent debts.
This Bill is due to commence from 25 March 2022 to coincide with the expiry of the current moratorium on forfeiture proceedings and restrictions on the exercise of Commercial Rent Arrears Recovery (CRAR). There will be a temporary moratorium, which means landlords will not be able to:
1. forfeit the lease;
2. exercise CRAR;
3. serve a winding-up petition;
4. serve a bankruptcy petition;
5. issue debt claims; and/or
6. draw-down on the tenant’s deposit,
in relation to protected rent debts until an award has been made by the arbitrator, or until the six-month window has passed and no arbitration has been sought.
A key point to note is once the Bill becomes law, if a debt claim was made for protected rent debts on or after 10 November 2021, either party can request that the claim be stayed. If a judgment was made (for protected rent debts) on or after 10 November 2021, it will not be enforced.
New Code of Practice for Commercial Property Relationships Following the COVID-19 Pandemic
A new code of practice (which replaces the current code) now applies to negotiations between landlords and tenants dealing with rental arrears. The code also sets out a framework for the arbitration process and how this will work once the Bill becomes law. The code is not binding, but the Government strongly advises that the parties follow it.
The Government is also asking people who have expertise or a special interest in the Bill to submit their views to the House of Commons Public Committee. A link to the consultation can be found here. The consultation closes at 5.00pm on 16 December.
We will continue to monitor the progress of the Bill through Parliament and will publish further updates as and when necessary.