Joe Perry considers what the UK might learn from the approaches of other jurisdictions to implementing binding arbitration to resolve Covid-related rent arrears.
As we continue to emerge from the pandemic, focus in the commercial real estate sector has naturally shifted to the estimated £7.5bn of rent arrears currently swilling around in the UK market.
In August 2021, the government confirmed that it would be legislating to address this backlog. It intends to ring-fence Covid-related rent arrears, create a more robust Code of Practice to guide parties when negotiating repayment, and introduce a “binding arbitration” scheme to be used where parties are unable to reach consensual resolution. The government hopes that these measures will “trigger the start of a return to business as usual”.
The government is yet to explain how these proposals will work in practice. Many are keen to understand how they will affect existing rent arrears debt proceedings, as illustrated by the recent decision in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd [2021] EWHC 2591 (Ch); [2021] PLSCS 156. The judge held that the landlord could recover approximately £2.9m in rent arrears, but dismissed the tenant’s earlier application to adjourn proceedings in anticipation of the government’s proposed legislation. Clarification will no doubt be welcomed by all parties.
With lawmakers soon putting pen to paper, now seems to be an appropriate time to consider how other jurisdictions have approached Covid-related rent arrears, and if their approaches might offer any food for thought for the UK government.
Australia
The UK government has suggested that its new scheme is likely to be based on the “successful Australian model”, so we can expect elements of this to be imported. The Australian government introduced a mandatory National Code of Conduct early on in the pandemic for dealing with commercial tenancy-related issues, much like the (non-binding) Code of Practice for commercial property relationships introduced in the UK.
Various pieces of local legislation have also been enacted by the governments of Victoria and New South Wales to regulate repayment of arrears. For example, owing to rising cases, the latter has recently introduced new measures allowing commercial tenants with a turnover of less than A$50m (£27m) – and that are eligible for certain government grants (which usually require at least a 30% fall in revenue as a result of the pandemic) – to require their landlord to renegotiate the rent in proportion to their decline in turnover. Of the rent relief provided, at least 50% must be in the form of a waiver, with the deferred balance to be repaid across the remainder of the lease term or, if necessary, over a 24-month lease extension period. Landlords are prevented from enforcing lease provisions, or claiming on securities, from 1 July 2021 to 31 December 2021, unless they can prove they have renegotiated rent (if requested) and, importantly, the matter has been referred to mediation.
The requirement for (or at least consideration of) mediation echoes the UK’s plan to introduce “binding arbitration”. However, mediation and arbitration are two very different beasts, with arbitration being binding by its very nature and often being just as costly and time-consuming as litigation. It is unclear whether the UK government really intends to introduce arbitration, or rather a broader menu of alternative dispute resolution mechanisms for parties to choose from.
It will also be interesting to see whether the UK government will restrict its new scheme to commercial tenants with a certain level of turnover, like the Australian regime, or whether it will apply to entities of all sizes. A one-size-fits-all approach would arguably have the benefit of creating less confusion in the market, as well as avoiding criticism aimed at the Australian model that larger tenants have been left to fend for themselves.
Spain and Germany
In Spain, commercial tenants temporarily had the ability to apply for moratoriums or temporary rent reductions, but this scheme was scrapped on 31 January 2021. Interestingly, though, in October 2020 the autonomous government of Catalonia adopted a decree which established an obligation for commercial landlords in the region to offer rent discounts for leases signed on or before 1 January 1995 where the tenant’s business had been affected by measures that restrict the use of the property or the activity for which it is leased.
Tenants can require their landlords to make a reasonable and equitable amendment to the terms of their leases and, if the parties do not reach an agreement within one month, the landlord will automatically be subject to discounts in rent. Arrears can be reduced by 50% for as long as the tenant’s activity is suspended.
This scheme has strong parallels to the one currently in force in Germany. Laws there not only prevent landlords from terminating leases owing to rent arrears accrued between 1 April 2020 and 30 June 2021, but also entitle tenants to ask that the terms of the lease are amended, on the basis that the core contract has been “disturbed” by the pandemic.
The concept of amending a contract due to disturbance is not a new one in German law, but a regulation passed in December 2020 introduced a legal presumption that coronavirus-related restrictions affecting the use of commercial rented space have disrupted the basis of the contract. The concept is that the parties would not have entered into the lease on the same terms if they could reasonably have foreseen the position in which they now find themselves.
Unlike in Australia and Catalonia, in Germany the lease will not automatically be amended should the parties be unable to come to an agreement. Whether and to what extent tenants can demand an adjustment – for example, a lower rent or a deferment of payment – remains a matter of comprehensive consideration of the circumstances of each case by the courts. This consideration by the courts can differ widely, which arguably could lead to uncertainty in the market. The UK government will have to consider a similar issue should binding arbitration be introduced – how will decisions of one arbitrator marry with those of another to ensure consistency of approach and to avoid unfair decisions being imposed without any real mechanism for appeal?
The Catalonian and German approaches are arguably even more radical than the binding arbitration scheme proposed by the UK government. Rather than requiring parties to enter into ADR, these laws give tenants the ability to strong-arm landlords into amending fundamental terms of their leases should they have been affected by the pandemic. The schemes have no doubt added fuel to arguments by landlords that they have continued to bear the brunt of the financial effects of the pandemic. They too often have obligations further up the chain, to creditors and shareholders, which are difficult to satisfy with forced rent reductions.
Belgium
The Belgian government has taken a comparatively more laissez-faire attitude to the rent arrears issue. Ancillary support measures were introduced to encourage landlords and tenants to the negotiating table. There are tax reductions available to landlords that agree to waive part or all of their tenants’ rent arrears, and local governments have set up schemes to enable businesses to apply for loans to help them pay rents, subject to them meeting certain criteria evidencing hardship caused by the pandemic. However, the Belgian government has left the negotiation of repayment of rent arrears to the parties – no formal guidance (mandatory or otherwise) has been issued – and escalations will most likely be dealt with by lawyers and, ultimately, the judiciary.
The Belgian government may have taken account of concerns raised by some that the proposals announced by the UK government go too far in retrospectively altering private contracts negotiated between sophisticated commercial entities. Those drafting the new legislation will need to consider this carefully and ensure that provisions are sufficiently robust so as to withstand potential challenges from landlords under the Human Rights Act 1998 and the European Convention on Human Rights. This is particularly so if the proposal for binding arbitration is considered alongside existing and extended protections afforded to tenants, such as the ban against eviction for non-payment of rent and use of CRAR. To soften the blow, the UK government might consider coupling its new proposals with further incentives for landlords, such as the Belgian idea of offering tax breaks to those that voluntarily come to the negotiating table.
With the UK government expected to release further details of its proposals in the near future, it will certainly be interesting to understand the scope of the new legislation. Approaches taken in other jurisdictions may offer some inspiration and, in places, some pitfalls to be avoided.
Joe Perry is an associate in the global real estate dispute resolution team at Ashurst
