Ringfencing commercial rent debt and the process of binding arbitration
On 16 June 2021, the Government announced a further extension to the ban on commercial evictions and commercial rent arrears recovery (CRAR) until 25 March 2022. As part of that announcement, the Government announced plans to “ringfence” certain outstanding rents and to implement a “compulsory arbitration process”. Further details of these measures were outlined in a Policy Statement issued by the Government on 4 August 2021. We discuss these further below.
The Government is planning to legislate to:
1. Ringfence rent accrued during the pandemic by businesses affected by enforced closures; and
2. Set out a process of binding arbitration to be undertaken between landlords and tenants.
The Government has clearly stated that those tenants who have not been affected by closures and have the means to pay, should continue to pay rent. It also expects commercial tenants to be paying rent under their lease from the point of Covid-19 restrictions being lifted for their sector. The above measures are intended to be used as a last resort, where tenants do not pay, and negotiations are unsuccessful.
How will the ringfencing work?
Once Government passes the legislation, the ban on evicting tenants for the non-payment of rent will only apply to “ringfenced arrears”. The periods of ring-fencing will be sector-specific covering commercial tenants affected from March 2020 and during the period in which they were subject to Covid-19 restrictions. It is not yet clear how “restrictions” will be interpreted. It is highly likely sectors such as hospitality and retail will benefit from the longest periods of ring-fencing.
The binding arbitration process
The Government has also published a voluntary Code of Practice (the “Code”) to encourage commercial landlords and tenants to work together to resolve disputes. The Code outlines a framework to work through requests for concessions on rental payments, including considering rent deferrals and waivers, dependent on periods of closure impacting the tenant’s business and ability to pay.
It is the Government’s expectation that:
— landlords should share the financial burden with tenants where they are able to do so and to give tenant’s breathing space to agree new terms;
— tenants who can pay, should pay; and
— parties will negotiate in “good faith” to reach a negotiated solution where possible.
In circumstances where an agreement cannot be reached, both the landlord and tenant will need to undertake binding arbitration (further details of the process to be released in due course). It is intended to be an impartial and manageable process and to provide a faster, cheaper and easier resolution than through the courts. Both parties will be expected to contribute to the costs of arbitration if both are found to have negotiated in “good faith”. However, if any party is found not to have negotiated in the spirit of the legislative principles, arbitrators may be empowered to award the cost of arbitration as part of their decision.
How can landlords and tenants prepare?
Once this legislation is passed, there will be a substantial change in a landlord’s ability to take enforcement action including:
— landlords will only be able to exercise their rights to evict any tenant for the non-payment of rent incurred prior to March 2020 and from the end of the ringfenced period;
— the new legislation applies only to debts for tenants impacted by COVID-19 business closures; and
— landlords will also be able to charge interest on rent due from the end of the ringfenced period onwards if such interest payments are included in the terms of the lease.
Landlords will also be able to take action if a tenant breaches any other terms of their lease, which gives rise to a right to forfeit. Tenants, therefore, need to be prepared to negotiate, consider their position with regard to ring-fenced arrears and pay the rent going forwards as normal. Tenants should also clearly state in writing to their landlords how payments they make are to be treated, specifying the period of time that the payment should be apportioned to, for the avoidance of doubt.
We will keep you let you know as soon as the legislation is passed, and a new system comes into place and to provide more detailed insight into how the process will work. In the meantime, we highly recommend landlords and tenants make preparations now in order to understand what the new rules may mean for them. We are experienced in advising both commercial landlords and tenants on the best way forward. Please get in touch.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: firstname.lastname@example.org