Covid: new binding arbitration and Code of Practice for commercial rent arrears

On 25 March 2022 the restrictions on forfeiture for commercial rent arrears and the use of Commercial Rent Arrears Recovery (CRAR) - introduced during the pandemic and extended several times - will come to an end.  

Following a consultation, earlier this year the Government announced that it would introduce binding arbitration for certain ringfenced rent arrears from tenants impacted by Covid-19 business closures.  

In this legal insight we explore what we know about the new rules so far and how the arbitration process will work. We also consider what landlord and tenants should be doing. 

Current rules and new proposals

This week the Government introduced the Commercial Rent (Coronavirus) Bill in Parliament which will bring in these new arbitration laws relating to any remaining commercial rent arrears accrued during the pandemic.  At the same time, the Government published a new Code of Practice to guide commercial landlords and tenants in their negotiations over these rent arrears.  This new Code of Practice takes effect immediately and replaces the Code of Practice previously in place.  The arbitration process is intended to be a last resort to apply where parties have been unable to reach agreement in accordance with the principles of the new Code of Practice. 

The current forfeiture and CRAR restrictions apply regardless of the nature of the tenant’s business or the cause of the rent arrears and will continue to apply until the new Act comes into force.  The new arbitration process, however, will apply only to businesses which were mandated to close, in full or in part, during the pandemic until the date that restrictions for their sector ended.  Arrears accrued outside these periods are not covered. 

What should landlords and tenants do?

The Government has reiterated its message that tenants that are capable of paying their rent should do so.  Where this is not the case, the starting point remains negotiations between landlords and tenants, with the Government announcement setting out the expectation that landlords should waive some or all rent arrears where they are able to do so. This sends out a clear message to landlords and may be something that is held against them should the matter end up in arbitration.  

The arbitration process will not be compulsory and parties will be free, and are indeed encouraged, to continue negotiations and seek alternative methods of resolution without resorting to arbitration. 

How will the arbitration process work?

If negotiations fail, either party will be able to refer the dispute to arbitration.  Arbitrators will need Government approval and a list of approved bodies will be published by the Department for Business, Energy and Industrial Strategy. There will be a six month window to apply for arbitration once the new legislation comes into force (intended to be from 25 March 2022), with a maximum 24 month time frame within which to repay the arrears within an arbitration award. 

Further protection for tenants 

The Government also announced that it will, as of 10 November 2021, be protecting commercial tenants from debt claims, including County Court Judgements, High Court Judgements and bankruptcy petitions for rent arrears accrued during the pandemic.  Details of this protection are not yet clear, including whether this applies only to businesses which were mandated to close during the pandemic.  It is also not clear whether this protection will impose restrictions on court action or whether it will merely discourage landlords to use this route, as the announcement sets out that landlords are encouraged to attempt to reach a negotiated settlement rather than pursue a County Court Judgement.  

When and where will the new rules apply?

The Commercial Rent (Coronavirus) Bill is intended to come into force on 25 March 2022 and will apply in England and Wales, with Northern Ireland having the power to introduce similar legislation.  Different rules apply in Scotland.  However, note that the Code of Practice applies throughout the whole of the UK and is in force immediately.  

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This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.