Lauren King and Peter Bourke expose the flaws in the government’s planned arbitration process for Covid lockdown rent arrears.
A major aftershock of the pandemic is the billions of pounds in rent arrears incurred by the forced closure of many non-essential businesses to attempt to control the spread of coronavirus.
The government cushioned and protected tenants throughout the pandemic, imposing a moratorium on the forfeiture of business leases, restricting the statutory commercial rent arrears recovery procedure, and significantly limiting the service of statutory demands and winding-up petitions. However, these measures were always only temporary, and the government has been grappling for months with how to strike the right balance between landlords and tenants to address the mountain of pandemic arrears, and avoid a cliff-edge moment for tenants when restrictions on landlords’ remedies are eased at the end of March 2022.
The government’s solution is to legislate to ring-fence rent arrears incurred during the pandemic only by business tenants that were forced by coronavirus-related laws to fully or partly close their business or premises. Where landlords and tenants cannot agree on how to resolve these arrears, either party can refer the matter to an arbitrator, who can award “relief from payment” (a full or partial write-off, or deferred payments) by applying prescribed principles, weighing up the tenant’s viability and the landlord’s solvency.
On 9 November 2021, the government introduced the Commercial Rent (Coronavirus) Bill in the House of Commons, and published a revised Code of Practice explaining how the arbitration process under the Bill will work and setting out principles to facilitate the negotiation and resolution of rent disputes, even if they fall outside the Bill’s scope.
The Bill is expected to receive royal assent before 25 March 2022, and has thus far had a smooth passage through parliament in spite of, among others, the Property Litigation Association and the Property Bar Association writing to the government, highlighting some concerns. Nevertheless, the Bill passed its third reading in the House of Commons with only minor amendments, although it was encouraging to see the House of Lords, in their debate on 27 January 2022, echoing many of the issues and concerns with the Bill raised by property litigators.
Arbitration – capacity, procedure, fairness, consistency
The speedy resolution of disputes about protected arrears underpins the Bill’s arbitration scheme. Thus, either party will have a limited period of six months from the Bill’s enactment to refer a dispute about ring-fenced arrears to arbitration.
It is estimated that 7,500 businesses could use the Bill’s arbitration scheme to resolve the payment of ring-fenced arrears. With thousands of arbitrations likely to take place over a comparatively short period, it is questionable whether there will be sufficient capacity; arbitrators are likely to have to take on multiple referrals, and there may well be conflict issues that need to be overcome which may delay appointments and impact procedural timetables. We also do not know what skill set the arbitrators will have, or what training they will have had on the Bill’s processes, procedures and principles.
The secretary of state may issue guidance on the exercise of arbitrator functions, but surely there must be a central body of information, facts and figures that arbitrators across the country are required to consistently apply to determine tenant viability and landlord solvency. Importantly, it is difficult to see arbitral bodies such as the Royal Institution of Chartered Surveyors or the Centre for Effective Dispute Resolution being prepared to take on the onerous role of overseeing and monitoring arbitrations to ensure consistency in quality and approach.
In deciding whether to award relief or dismiss a reference, the arbitrator must consider a number of issues: whether the tenant is viable, or would be if awarded relief; the landlord’s solvency; whether or not the case relates to a business tenancy; whether the debt is in scope (to what extent the tenant’s business was restricted or forced to close); and whether the arrears might have been compromised at any stage, which would take them outside scope. All of these issues have the potential to be complex, needing detailed evidence and legal analysis, which the Bill does not cater for within the short, tightly confined procedures it anticipates. There are likely to be delays, expense and inconsistency between awards, as well as court judgments and appeals on questions of statutory interpretation.
The absence of any specific benchmarking of the viability of tenants’ businesses is a particular concern. While clause 16 of the Bill prescribes a number of factors that arbitrators should consider when assessing viability, and the Code of Practice sets out a non-exhaustive list of evidence that could be considered, there is no specific definition of what constitutes viability – the parameters are not clear-cut. Does “viable” mean that a tenant is breaking even and no more, or does it denote a reasonable level of profit for the tenant business? In assessing business performance, business models vary hugely, different sectors have different risk profiles and recover at different rates, and it is difficult to predict how the pandemic will change working patterns and influence consumer behaviour in the future, which will also impact questions of tenant viability and landlord solvency. Viability is almost an unsolvable conundrum.
Although it is possible to consolidate different arbitrations in certain circumstances, the position where a tenant entity has multiple leases of premises across the country may not be straightforward. There will be discrete circumstances that apply to different leases and premises, and it is conceivable that numerous arbitrators could end up assessing the same tenant entity’s viability independently, which could lead to conflicting findings and the tenant incurring the cost and expense of multiple arbitrations. Arbitrators’ fees, to be set by the appointing arbitral bodies, are another concern.
Parties have to share the arbitrators’ fees (or one party may have to pay a higher proportion if the arbitrator considers that appropriate), but in more complex cases, as many that are referred under the scheme are likely to be, costs could easily escalate with the involvement of legal and financial professionals. If one party cannot afford these fees (and bearing in mind the scheme is aimed at supporting businesses on the brink), it could compromise what should be a level playing field under the scheme and unfairly impact the outcome.
Confidentiality
Awards “with reasons” will be published to inform the market and facilitate negotiations, ensure consistency in awards and reasoning, and promote transparency of the scheme’s operation. However, “confidential information” must be removed from awards, which, although imperative, could limit the value and purpose of publication altogether.
Oral hearings, which either party may insist on, will be held in public (though it is unclear how the hearing will be publicised), unless both parties disagree, and arbitrators have no discretion to determine whether an oral hearing is appropriate and/or whether or not it should be held in public.
The publication of awards and hearings could cause serious problems for both landlords and tenants where questions of viability and solvency of their businesses are being considered. The possibility of an adverse ruling on viability that could be put in the public domain will deter some tenants from using the scheme, and the threat of an oral hearing could itself be used as a tool to pressurise a party, which has concerns about its financial affairs being made public, to settle.
Who is protected?
While the Bill gives arbitrators a wide discretion on many issues, its application is arguably too narrowly drawn. There are a number of parties, sectors and scenarios that appear to fall outside the ambit and protections of the Bill, so there will be circumstances where the result of an arbitration will simply push the problem of rental shortfall onto other stakeholders rather than solve the issue once and for all.
Unlike the Coronavirus Act 2020, the Bill does not extend the definition of business tenancies to cover head tenants that are not themselves in occupation of business premises. The Bill’s narrow definition of business tenancies will mean that rent owed by head tenants will not be in scope, which is difficult to reconcile when many head tenants will themselves be retail or hospitality operators that have been badly affected by the pandemic. In circumstances where the occupational tenant’s arrears for a protected period are reduced or deferred as a result of arbitration, the head tenant will end up picking up the shortfall, with no recourse to the scheme.
There is some limited protection for guarantors under the Bill, but there are some curious lacunas. For instance, while guarantors can apply to stay debt claims for in-scope arrears commenced between 10 November 2021 and the Bill’s enactment, they do not benefit from the moratorium on all landlords’ remedies while an arbitration is on foot. Guarantors also cannot make a referral or participate in the scheme, even though they may be pursued for a protected rent debt that would be in scope if the tenant was being pursued for the same debt, in respect of which the tenant could be granted relief (including a write-off).
A solution that raises more problems?
The Bill is a well-meaning attempt to provide a swift, fair and proportionate solution to a huge rent debt crisis. Unfortunately, the reality is that the Bill creates an imperfect scheme that lacks clear parameters, predictability and confidentiality, and which may deter rather than encourage many tenants that genuinely need the financial relief it could provide.
As presently drafted, the Bill could ensure the employment of expensive lawyers and take up valuable judicial time for several years, which cannot have been the intention. Ironically, perhaps its shortcomings will encourage more negotiation and settlement without recourse to the scheme at all. There is still hope as the Lords continue to debate and discuss the Bill during their committee stage, which could produce some improvements to the drafting of the Bill to address the above concerns before it is enacted.
Lauren King is a member and Peter Bourke is the chair of the Property Litigation Association’s Law Reform Committee
