By the end of this month the UK Government will have passed new legislation which provides tenants with relief from payment of certain rent debts for businesses adversely affected by COVID-19.
The hospitality sector was one of the worst impacted by the enforced lockdowns, Nigel Ball from our Licensed & Leisure team looks at how landlords and tenants can navigate their way through the new arbitration scheme for rental arrears.
What is the COVID-19 rent arbitration process?
This is a new legally binding scheme designed to resolve disputes between landlords and tenants regarding unpaid rent debts that have built up during periods when businesses were forced to close under COVID-19 lockdown restrictions. The Commercial Rent (Coronavirus) Bill is currently going through parliament and is expected to be in place before the end of March 2022.
What are tenants expected to pay when the rent moratorium ends on 25 March 2022?
Tenants’ contractual liabilities have not changed, they are liable to pay all rents. However, the moratorium introduced by the Government provided a protected period during which some of the eviction and debt recovery measures that a landlord normally has were limited. The protected period covers all rent debts that have been accrued since March 2020 up to the date that the mandated closures ended. For most hospitality businesses in England this is 18 July 2021.
The protected period is extended by the new Bill to six months after the legislation is passed unless an agreement has already been reached, or either the landlord or tenant decides to instigate the arbitration process, in which case the moratorium is extended until the resolution of the dispute.
What protection does the moratorium offer to tenants?
During the protected period landlords are prevented from using numerous remedies to recover their debts including claims in civil proceedings, commercial rent arrears recovery, rights of entry and forfeiture, or using a tenant’s deposit.
What debts are protected by the moratorium?
The protected rent debts include all rents, service charges and interest which has accrued during the protected period.
Can the arbitration process be avoided?
Yes, it can be if landlords and tenants come to an agreement by themselves, but at this late stage it’s unlikely that one will now be agreed before March 25, so it is advisable to start preparing for the arbitration process.
How are tenants expected to negotiate the amount of rental arrears they pay back?
The Government has published a Code of Practice which offers full guidance to both landlords and tenants as to how they should conduct negotiations. It encourages transparency and collaboration; both parties should find a way to ensure otherwise viable businesses who have been unable to pay their rent during the COVID-19 pandemic, are able to continue trading.
It is expected that an arbitrator may take into account whether parties have complied with the Code of Practice when they make their decisions.
Are landlords going to recover the full amount of rent they’re owed?
The final decision is up to the arbitrator, based on the principles that are set out in the Bill relating to the viability of the tenant and solvency of the landlord. The legislation says that those tenants who can pay should pay, but also that whole or part of the rent debt could be written off, or paid back over a period of not more than two years.
What rental arrears offer are landlords obliged to accept?
There are no set outcomes proscribed by the draft legislation. Every decision will be based on the individual circumstance, taking into account the tenant’s viability and the landlord’s solvency.
How long does the rent arbitration process take?
The initial process of applying for arbitration and making the necessary formal offers could take up to three months to complete. Thereafter the decision should be issued as soon as is reasonably practical, which in itself will depend upon whether a hearing is required rather than a decision based just on the submitted papers.
Who will the arbitrators be?
It is not yet known which arbitral body will be used to make the appointments. However the arbitrator will be expected to have business experience, and could be drawn from several different professions, including accountancy, surveying or legal.
What is the cost of the arbitration and who pays it?
The cost may differ depending upon the arbitral body used and the experience of the appointed arbitrator. The applicant must pay the cost of the arbitration up front, although the arbitrator’s final decision may require the other party to repay some, all or none of these costs. However each party is to meet their own costs (e.g. legal fees).
What should landlords or tenants who still have unresolved debts do now?
Our advice is that parties should be negotiating in a transparent and collaborative manner. Steps can be taken to prepare for the arbitration process, by making sure that all requisite evidence has been prepared and shared with the other party. Also the legislation requires each party to submit formal offers along with supporting evidence. Consideration should be given to making an offer which is fully complaint with the principles of the bill; the offer which the arbitrator considers to be most in line with these principles will win the day.
About the author
Nigel Ball is a director in our Licensed & Leisure team. He has over 30 years' experience in the real estate industry and leads our national team of lease advisory experts across the UK.
To get in touch, contact Nigel.Ball@colliers.com.