On 16 June 2021 the government announced that the moratorium on commercial evictions, which was due to end on 30 June 2021, will be extended to 25 March 2022. The moratorium has prevented landlords of business premises from forfeiting leases for non-payment of rent since the early stages of the pandemic. The restrictions on exercising commercial rent arrears recovery will also be extended until 25 March 2022 and the current prohibition on winding-up proceedings based on statutory demands is to be extended until the end of September 2021.
This announcement is a significant setback for landlords. While these interventions have not altered the tenant’s obligation to pay rent under the lease, landlords are growing tired of the repeated suspensions of their ability to enforce payment, which have been imposed on them without their consent, and the lack of any long-term strategy to facilitate the recovery of rent arrears that have built up during the pandemic.
Perhaps the most interesting part of the announcement was a new commitment to introduce a mandatory, “binding arbitration process” for the resolution of rent arrears disputes between landlords and tenants of commercial premises where agreements have not been possible. This would represent a significant change to the existing (and entirely voluntary) Code of Practice that is based on principles of “transparency and collaboration”, and which sets out a series of possible concessions that landlords may be prepared to agree with tenants and suggests the possibility of a third-party mediator being employed to help facilitate any such negotiations, but only if the parties both agree.
According to the announcement, the plan is to shift from voluntary code to compulsory regime: “If in some cases, an agreement cannot be made, the law will ensure a binding arbitration process will be put in place so that both parties can come to a formal agreement. This will be a legally binding agreement that both parties must adhere to.”
The new rules will apparently be established to ringfence outstanding unpaid rent that has built up during the pandemic. They will require landlords to make allowances in respect of the ringfenced rent arrears and share the financial impact with their tenants to ensure that Covid-related rent debts will be settled with finality.
What is arbitration?
So what is arbitration and why is the government keen to use it? Arbitration is a binding alternative dispute resolution process. It is characterised as a consensual process, with the parties generally agreeing to forgo their right to a court hearing by either inserting an arbitration clause into their contract in respect of future disputes or agreeing to submit to arbitration once battle lines have been drawn. The perceived benefits of arbitration include speed and efficiency, flexibility of process, reduced cost, confidentiality and finality.
One can immediately see why arbitration is an attractive option in certain property disputes, especially where there are technical issues or issues of construction that require resolution by a tribunal with relevant expertise. Arbitration is already frequently used in certain landlord and tenant disputes, for example, disputes involving agricultural tenancies and business lease renewals using Professional Arbitration on Court Terms (PACT). The courts in England and Wales were slow even before the pandemic, and given the additional backlog caused by disruption in the past year and the commercially sensitive nature of certain disputes, the prospect of increased confidentiality and speed is likely to be attractive.
However, arbitration is not guaranteed to cost less than litigation and an obligation to enter a binding arbitration leaves limited scope for challenge or appeal. Under the Arbitration Act 1996, appeal is limited to challenges to substantive jurisdiction, serious (procedural) irregularity and challenges on a point of law where the decision is either obviously wrong or raises a question of general public importance and is open to serious doubt.
As matters stand, there is limited detail on how the binding arbitration process that is to be introduced by primary legislation is expected to work in practice. The business secretary, Kwasi Kwarteng, has said that the new arbitration process would provide commercial tenants and landlords with “peace of mind that Covid-related rent debts will be settled fairly, and with finality”, but that statement raises more questions than it answers.
Detail will be provided in due course, but it is worth pausing to consider what any arbitration process might look like and the issues that might arise.
Compulsory arbitration
The reference to a binding arbitration suggests that it will be compulsory. That is not, of itself, without precedent, as examples of non-consensual arbitrations are to be found in relation to specific sectors, where statute has intervened – for example: disputes under a farm business tenancy (under the Agricultural Tenancies Act 1995); disputes relating to the terms of a tenancy of an agricultural holding (under the Agricultural Holdings Act 1986); disputes between parties to a construction contract (under the Housing Grants, Construction and Regeneration Act 1996); and disputes between tenants and pub-owning companies which are referred to the Pubs Code Adjudicator (under the Small Business, Enterprise and Employment Act 2015). In each of those cases, arbitration is imposed by statute, rendering the consent of the parties unnecessary.
Crucially, however, statutory arbitration is generally introduced on public policy grounds to redress perceived unfairness in the market or unequal bargaining power. For example, in the construction context, statutory arbitration was introduced to address concerns that unfair payment practices in construction contracts were contributing to a high level of insolvency in the construction sector. Similarly, intervention in the pub industry has been justified by the stark inequality of arms between pub owning companies and pub tenants. However, public policy has famously been described as “a very unruly horse… once you get astride it you never know where it will carry you” and, in the commercial landlord and tenant context, the balance of power is not inevitably tipped one way: as the Code of Practice recognises, every landlord and tenant relationship is different. The tenant of a retail unit may be a well-capitalised business with greater reserves to weather the pandemic than their landlord and yet may refuse to pay rent at the expense of local authorities, pensions and savings funds or other small-scale commercial property owners that are dependent on the rental stream. In that context, justifiable underlying policy objectives for imposing punitive, non-consensual, arbitration measures may be more difficult to identify.
Retrospective application
The proposal is further complicated in that the intention to “ringfence” outstanding unpaid rent and require landlords to make “allowances” so as to share the financial impact with their tenants would retrospectively affect contractual rights and liabilities which have already accrued.
There is a presumption, both at common law and under section 16 of the Interpretation Act 1978, that legislation is not to have retrospective effect. As a matter of constitutional principle, retrospective legislation of any sort requires clear words or necessary implication if it is to impair or remove rights and obligations that have already accrued. So, for example, despite being said to be expressly applicable to “all leases whether made before or after the commencement of this Act”, the statutorily implied term in section 19 of the Landlord and Tenant Act 1927, that a landlord cannot make the grant of consent subject to payment was held only to require the lease to be read subject to that term from the date of the Act coming into force, with the effect that breaches that had already accrued before that date were unaffected: Gardner v Cone [1928] Ch 955. By analogy, in the present context, the arrears that are to be ringfenced will result from breaches arising prior to the operation of the statute. Provisions intended to have retrospective application will require serious thought and very precise drafting.
The scope of arbitration
Pending further details, questions also arise as to the purpose and scope of the obligation and the nature of the dispute that must be referred to arbitration. These matters will require careful consideration.
Will arbitration be available to any tenant, even those not in genuine distress that are treating the moratorium as permission not to pay? Would the purposes of the arbitration be limited to a determination as to whether the rent is in fact payable with a view to freeing the courts of the burden associated with having a deluge of such cases? Or will it go further as suggested below?
If it is the former, then given the comprehensive judicial rejection of a large range of tenant defences to rent arrears claims in recent cases including Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863; [2021] EGLR 25 and Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others [2021] EWHC 1013 ; [2021] PLSCS 80, the scope for genuine dispute is fairly limited. In an average case, where the lease clearly sets out what is payable and the rent is not paid, there is no right of set-off and no available defence in fact or law going beyond those already considered by the courts, it is difficult to see why an arbitrator should assume jurisdiction over a claim to which there is no substantial defence.
In connection with that, what would be the applicable standard of “dispute” for the purposes of the proposed statutory arbitration? Would it be the triable issue standard, whereby a dispute arising from a bad defence may cease to be a dispute at all or would there be an obligation to arbitrate in respect of any non-payment? If mere non-payment amounts to a dispute, would all associated proceedings relating to the underlying debt (for example, insolvency proceedings, disputes over break clause conditions and 1954 Act ground (b) oppositions) be the subject of an automatic stay? If tenants are entitled to a stay of court proceedings even where debt is not genuinely disputed (which would be the case if section 9 of the Arbitration Act 1996 applies), that seems unfair in circumstances where the parties have explicitly agreed that the rent would be payable and did not agree to refer disputes under the lease to arbitration.
If a forced arbitration precludes landlords from obtaining summary judgment, no matter how bad the defence, it opens up the possibility of abuse by tenants unilaterally choosing arbitration to bypass or delay an inevitable insolvency, leaving the landlord in a worse position in a later winding up after the arbitration has run its course. It remains to be seen whether any safeguards or control mechanisms will be included within the statute – for example, by limiting the scope of disputes that may be subject to compulsory arbitration to those which raise a triable issue or to make that a condition of any stay or dismissal of underlying court proceedings.
Would the scope of the arbitration extend to consideration of the landlord’s entitlement to forfeit and questions of relief? The former would almost certainly be straightforward as long as waiver remains out of contention pursuant to section 82(2) of the Coronavirus Act 2020, but any determination as to relief would be more complicated as the jurisdiction to grant relief presently rests with the court.
If the proposed arbitration is intended to be limited to making determinations as to the parties’ contractual rights and obligations in respect of the ringfenced rent, it is difficult to see what benefit a separate arbitration process brings given the nature of any dispute and the fact that ordinary rent recovery proceedings and claims for forfeiture are already adequately dealt with in the courts.
Government-sanctioned rewriting of the lease?
However, the language of the government announcement suggests that it envisages going much further than simply introducing a new forum for resolution of these disputes, by forcing new agreements on the parties, with arbitrators determining whether and to what extent arrears are to be written off or reduced, thereby altering the parties’ existing contractual arrangements. This would be a bold step and raises some difficult questions.
In terms of the process, would the arbitrator be given absolute or circumscribed powers to vary the rent in order to meet the stated objective that the landlord should share the financial impact with the tenant? Or would their powers be limited to questions of procedure, including the imposition of payment plans in respect of the agreed rent to assist tenants with cash flow? If the arbitrator is empowered to assess what proportion of the arrears are to be payable, what criteria and principles will be applied to determine the correct sum? Will the parties’ economic circumstances be relevant? If so, what would the evidential benchmark be and how would the evidence be weighed when making a determination? How would uniformity, certainty and transparency of process be ensured so as to prevent inconsistent decision-making by different arbitrators? Will landlords be entitled to compensation as a result of being deprived of their contractual rights that have already accrued?
As a matter of principle, if the legislation does entitle arbitrators to rewrite the parties’ contractual obligations retrospectively so that landlords are required to accept less rent than was due to them under their agreement, that offends the principles of contractual autonomy and natural justice. The proposal may also raise questions about compatibility with Article 6(1) of the ECHR (right to a fair trial) where the parties have agreed that the courts of England and Wales have exclusive jurisdiction in relation to the lease, do not voluntarily waive their rights and are to be subjected to very limited rights of appeal. A requirement for landlords to make allowances against their will and without compensation also gives rise to the possibility of an argument that the deprivation of rent constitutes an unjustifiable interference with their rights under Article 1 of the First Protocol to the ECHR and imposes a disproportionate burden on them.
Interfering with the parties’ contractual obligations and the associated uncertainty the announcement brings is also likely to have wider implications for the broader market, including investors, lenders and insurers, albeit that the impact on these sectors and on the economy more generally is at present difficult to predict.
Final words
The announcement of the introduction of a new mandatory arbitration process to deal with Covid-19 commercial rent arrears raises more questions than it answers. The key will be in the detail, and it will be interesting to learn more about the scope and objectives of the proposed procedure and how far the government is prepared to go in terms of altering pre-existing contractual obligations. None of those issues are straightforward.
If legislation is only introduced after the end of the moratorium on forfeiture, then one wonders if many disputes will remain unresolved by then anyway. The British Property Federation study of UK retail, hospitality and leisure properties has found that approximately 50% of all rent owed since March 2020 has been paid and that a further 27% of property owners and tenants have reached compromise agreements. Perhaps the main takeaway from the recent announcement is that it presents a clear warning to those landlords who continue to be owed rent and have not reached agreement with their tenants that they might be better off resolving their outstanding disputes quickly rather than risk an unpredictable compulsory arbitration process sometime in the future that could materially alter their rights and prospects of recovery.
Myriam Stacey QC and Brooke Lyne are barristers at Landmark Chambers
