The Commercial Rent (Coronavirus) Act 2022
The Commercial Rent (Coronavirus) Bill is being finalised in Parliament and should receive Royal Assent, 25 March 2022. The Act will be called the Commercial Rent (Coronavirus) Act 2022 ("the Act").
This Act is intended to prevent a glut of tenant insolvencies when the general moratorium on forfeiture and other landlord remedies ends on 25 March 2022 as up until now landlords have been prevented from enforcing recovery of rent arrears during the pandemic.
Where landlords and tenants have failed to reach agreement on the payment of rent accrued when the tenant’s business closed, the Act will, subject to the landlord not being made insolvent, secure relief through Arbitration for those tenants who are unable to pay lockdown arrears but whose businesses would survive if they were granted relief from payment (whole or part).
The Act is very unclear in many respects (who is an appropriate Arbitrator and what the position is when a landlord has already made some rent concessions) and will be relied on by tenants to seek substantial rent relief.
What is the purpose of the act?
The Act is intended to promote the amicable resolution of disputes as to the viability of the tenant to pay lockdown arrears (being outstanding rent, service charge, insurance arrears, and interest thereon), that accrued whilst businesses were forced to close during the COVID-19 pandemic. Such arrears are termed "a protected rent debt". They also include any sum deducted by the landlord from a rent deposit account in relation to any period of lockdown.
- a statutory arbitration process to resolve disputes as to the ability of the tenant to pay what is due; and
- a moratorium to prevent landlords from using their usual enforcement remedies to recover a protected rent debt pending the institution and/or disposal of the arbitration process. No enforcement action can be taken for 6 months (i.e. until 25 September 2022) or, if later, until the arbitration process is concluded if arbitration is instituted within 6 months.
When does the Act come into force?
The Act is anticipated to become law on 25 March 2022.
Which tenancies will the Act apply to?
It will apply to premises occupied by a tenant for business purposes – being tenancies under, or contracted out of, Part 2 of the Landlord and Tenant Act 1954.
However, for the arbitration process to apply, the tenant must not be in an Insolvency Process and there must not already be an agreement in place between the landlord and tenant regarding payment of the arrears in question.
Which arrears will constitute protected rent?
For arrears to amount to “protected rent”, two conditions need to be fulfilled:
- Firstly, the tenant’s business must have been “adversely affected by coronavirus”. This means that the business must have been subjected to a legally enforceable closure requirement between 21 March 2020 and 18 July 2021 (in England) or 7 August 2021 (in Wales). If the tenant was only required to close part of their premises (for example the seating area in a café), the condition will still be satisfied. However, businesses such as pharmacies will not fall under the scope of this as they were never subject to a legal closure requirement..
- Secondly, the arrears must have been accrued within the “protected period”. This is from 21 March 2020 and ends with the last day that the business was subject to a closure requirement or a specific coronavirus restriction. Specific coronavirus restrictions include any government regulations controlling how a business could operate. For example, for a café in England, the protected period will run until 18 July 2021, when restrictions ended on table booking size and requirements for customers to eat when seated.
Tenant's viability and landlord's solvency
The Arbitrator will assess whether the tenant’s business is viable enough to pay the arrears or whether it could be viable if the tenant was offered relief from the protected rent debt. Viability is not defined in the Act and will be in the discretion of the Arbitrator.
Where necessary and appropriate to keep the tenant viable, and provided the landlord will remain solvent, the Arbitrator can grant a tenant (and any guarantor) relief from payment of a protected rent debt by:
- Writing of the debt in whole or part; and/or
- Deferring payment of the debt in whole or part; and/or
- Reducing or writing off any interest payable.
Any Award by the Arbitrator should be aimed at preserving or restoring the viability of the tenant's business so far as that is consistent with the landlord's solvency. No relief should be granted unless warranted to keep the tenant's business afloat.
When assessing viability, the Arbitrator will consider accounting documentation relating to various elements of the tenant's business, including (but not limited to):
- the business’ performance since March 2020;
- the tenant’s assets and liabilities (including liabilities of other tenancies to which the tenant is a party);
- previous rental payments made under the business tenancy from the tenant to the landlord;
- overdue invoices, tax demands or demands from other creditors; and
- the impact of coronavirus on the business.
Such accounting documentation will cover bank accounts, audited and management accounts, profit forecasts, dividends paid and/or grants or loans obtained since March 2019, overdue invoices of tax demands, creditor demands and money judgments.
So far as a landlord's solvency is concerned, the Arbitrator will have regard to the landlord's assets and liabilities and any other financial information the Arbitrator considers appropriate.
How will the process work and who pays?
Both landlords and tenants will have the right to begin arbitration proceedings within the initial 6 months (i.e. by 25 September 2022) as follows:
- Either the landlord or tenant will serve notice upon the other party of their intention to bring the matter to an approved arbitration body.
- Within 14 days of receipt, the respondent may submit a response. If the respondent submits a response, a reference to arbitration can be made after a further 14 days have elapsed. If the respondent does not respond, a reference can be made once 28 days have passed.
- The reference to arbitration is then made to an approved arbitration body. This reference must include a formal proposal outlining how to resolve the matter and must be supported by the relevant financial evidence.
- The respondent will have 14 days to submit an alternative proposal, then both parties must submit their final revised proposals within 28 days.
- The Arbitrator will first assess whether the dispute falls under the scope of the Act by assessing whether the tenancy is a business tenancy, whether the debt is a protected rent debt that is not subject to an already concluded agreement, and whether the tenant’s business is viable?
- The Arbitrator will assess both parties’ proposals in relation to the tenant's viability and/or the landlord's solvency. If one proposal is more suitable than the other, the Arbitrator must make an Award as set out in that proposal.
- Each party has to pay their own costs and 50% of the Arbitrator's fees (save the Arbitrator can order a party who has not behaved reasonably to pay a greater proportion of the Arbitrator's fees).
NB: Many tenants will no doubt want to delay any reference to the last moment to secure more delay as to payment so landlords may wish to take the initiative in commencing the arbitration process. However, it is the party who commences the process that has to fund the Arbitrator's fees.
Will the arbitration award be confidential?
No it will not be automatically, unlike an ordinary arbitration under the Arbitration Act 1996. There will be an oral hearing held in public (but both parties can agree beforehand to have this made private). The reason the default is that arbitrations be public is so that some caselaw is known about and therefore helps to resolve other disputes.
Which landlord remedies are restricted?
The Act introduces a moratorium to prevent landlords from using their usual remedies to enforce payment of protected rent debts. This includes restrictions on:
- the Commercial Arrears Rent Recovery process
- deposit withdrawals
- appropriating rent payments
- issuing debt claims
- enforcing money judgments
- winding up or bankruptcy petitions
- conventional Arbitrations, and
- tenant restructuring procedures
The Act seems very late in the day and does not factor in that landlords have engaged heavily with tenants already. There is a real danger the Act will punish those landlords who have actually given their tenants time to pay. But, hopefully, it will force real engagement where necessary so that parties avoid the costly and unpredictable arbitration process (which would only damage their relationship further).
Jonathan Ross is a Partner in our Property Litigation team.
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