The UK government will today publish a bill implementing its proposals for a new arbitration process to resolve pandemic-related debt disputes between commercial landlords and their tenants.
Business secretary Kwasi Kwarteng said in a statement that new laws being introduced in parliament today (9 November) will establish a legally binding arbitration process for commercial landlords and tenants who have not already reached an agreement.
The bill will apply to commercial rent debts related to the mandated closure of certain businesses such as pubs, gyms and restaurants during the pandemic. The result of the arbitration process will be binding on both parties.
The government plans to have the new system in place by March 2022, when temporary rules protecting commercial tenants from eviction come to an end. In the interim, the government said it plans to put in place a new code of practice to help landlords and tenants negotiate.
“Today’s measures provide commercial landlords and tenants with the clarity and certainty they need to plan ahead and recover from the pandemic,” Kwarteng said in a statement.
“We encourage landlords and tenants to keep working together to reach their own agreements ahead of the new laws coming into place, and we expect tenants capable of paying rent to do so,” he said.
Even so, lawyers suggest that the process might have the unintended consequence of exacerbating commercial landlord and tenant disputes.
“The big gamble for the government is that the new arbitration scheme won’t encourage commercial landlords and tenants to come together to settle rent arrears positions, but have the opposite effect,” said Mathew Ditchburn, head of real estate disputes at Hogan Lovells.
“Many landlords who want to engage and negotiate settlements have used the threat of court action to bring tenants to the table. Now that final remedy is to go,” he said.
In addition, the new scheme won’t start until next spring, which could lead to massive backlog of cases, he said.
Also, the protections under the scheme are limited to rent arrears accrued during mandated closure, not from times when businesses could open but might be trading badly due to low footfall or social distancing.
“Commercial tenants who think that the new arbitration scheme will get them off the hook from paying rent arrears may be in for a shock,” he said.
“We may yet see another spike in tenant insolvencies in 2022.”
Joanna Lampert, partner in the property litigation team at Mishcon de Reya, said: “The government has made clear that the new arbitration scheme is intended to be used only as a last resort where landlords and tenants have been unable to resolve unpaid rent disputes between them.
“The scheme seems to strike a reasonable balance between the interests of landlords and tenants with the intention of providing a relatively quick and cost-effective means of resolving disputes.
“Underpinning the scheme are two key principles. Firstly, that an arbitration award should be aimed at preserving the viability of a tenant’s business, so far as that is consistent with preserving the landlord’s solvency. The second principle is that a tenant should meet its obligations regarding payment in full and without delay provided that its viability is protected.
“Having regard to those principles, it is to be hoped that those landlords and tenants who have yet to resolve their disputes will, in the majority of cases, be able to reach agreement without recourse to arbitration.”
