New moratorium and binding arbitration for ringfenced commercial rent arrears in England & Wales

Last month saw the end of the moratorium on forfeiture for commercial rent arrears in England, as well as the Commercial Rent (Coronavirus) Act 2022 (the Act) receiving royal assent.

The new Act brings in provisions which extend the protection of commercial tenants in respect of certain arrears recovery in England and Wales.

Forfeiture moratorium

The forfeiture moratorium was brought in by the Coronavirus Act 2020 at the beginning of the Covid-19 pandemic to protect business tenants, many of whose ability to trade was impacted as a result of lockdown (and other) restrictions.  The moratorium was initially set to expire in June 2020, but was extended four times until its expiry in England on 25 March 2022.  In Wales, the forfeiture moratorium has been extended until 24 September 2022. 

As well as a forfeiture moratorium, landlords were also restricted in exercising Commercial Rent Arrears Recovery (CRAR) and using winding up petitions. 

New protections under the Commercial Rent (Coronavirus) Act 2022

The Act introduces new business tenant protections which will apply only to 'protected rent debts' accrued whilst businesses were forced to close by lockdown restrictions, or when a sector was subject to specific restrictions.  These debts will be ringfenced for the purposes of the Act.

Landlords and tenants remain encouraged to negotiate and reach agreement on rent arrears, in line with the Government's non-binding Code of Practice which was introduced in November 2021.

Both landlords and tenants (but not guarantors) are able to apply for arbitration within 6 months of the Act becoming law.  This period therefore ends on 23 September 2022 (although it may be extended).

To allow negotiations and arbitration to take place, landlords are subject to a temporary moratorium on enforcement of protected rent debts during this period.  This moratorium prevents landlords from:

• making a debt claim;

• using CRAR;

• forfeiture;

• withdrawing from a deposit or requiring a top up; and

• presenting a winding up or bankruptcy petition on certain grounds.

Where an arrears dispute has been referred to arbitration under the Act, the moratorium ends when the arbitration concludes.  This might be earlier or later than the 6 month period.

It is important to remember that the moratorium applies only to protected rent debts and that in respect of arrears that fall outside this category landlords in England now have all arrears recovery tools at their disposal again.  Landlords in Wales, however, are still restricted by the general forfeiture moratorium for all commercial rent arrears until 24 September 2022.

Does the Act have retrospective effect?

Where a debt claim is made between 10 November 2021 and 24 March 2022 in respect of a protected rent debt, either party may apply for the claim to be stayed to allow the dispute to be resolved under the Act.  The court must stay the claim unless it is satisfied that the claim does not relate to or include a protected rent debt.

In respect of any judgment in favour of a landlord issued between 10 November 2021 and 24 March 2022 relating to a protected rent debt which remains unpaid, this may not be enforced during the moratorium period and relief from payment of the judgment debt may be resolved by arbitration under the Act despite the judgment.

What are protected rent debts?

Protected rent debts are:

• rent, service charge, insurance rent, interest and VAT;

• due under a business tenancy (those to which Part II of the Landlord and Tenant Act 1954 (the 1954 Act) applies, including contracted out tenancies);

• where the whole or part of the business or premises were required to close due to coronavirus regulations; and

• attributable to the 'protected period', which starts on 21 March 2020 and ends on the earlier of: the last day the business or premises were required to close or were subject to regulations as to how the business was run or the way the premises were used; and 18 July 2021 in England, and 7 August 2021 in Wales.

Position of tenants who have underlet the whole of their premises

As the Act does not apply to tenancies which fall outside Part II of the 1954 Act, tenants who have underlet the whole of their premises (and therefore fall outside the 1954 Act as they are not in occupation) do not appear to benefit from the protection of the Act.  These tenants may find themselves between a rock and a hard place where, in their position as tenant, their landlord is able to use traditional methods of rent arrears enforcement against them, whilst, in their position as landlord, having to observe the undertenant's protection under the Act.

How will the arbitration process work?

Each of the landlord and the tenant can start the arbitration process by serving a notice of intention on the other, allowing the other 14 days from receipt of the notice to submit a response.  The next step is to apply to an approved arbitration body for the appointment of an arbitrator.  This can be done after 14 days of receiving a response from the other party, or after 28 days, starting on the day of service, where no response is received.  The reference to arbitration must include a proposal in relation to the protected debt.  This must be supported by evidence.  There may then be proposals in response and/or revised proposals.  The arbitrator will ultimately choose between these proposals, provided that they are consistent with the arbitration aims.  The Government will publish a list of approved arbitration bodies.  So far, RICS has been named as an approved body.

The arbitrator must have regard to the following principles:

• That any award should be aimed at preserving or restoring the viability of the tenant’s business, so far as that is consistent with preserving the landlord’s solvency; and

• that the tenant should be required to meet their obligations to the landlord, so far as this is consistent with the preservation of the viability of the tenant’s business.

The Act does not contain any detail as to the meaning of viability.  However, the Government has issued draft guidance which sets out a list of information which the arbitrator may wish to consider, including management accounts, bank account information and profit margins.  Tenants may be concerned about privacy issues in respect of providing this information. 

The parties must pay their own legal and other costs and these cannot be recovered under the lease.

What awards can the arbitrator make?

The arbitrator must dismiss the application where it is found that the tenant's business is not viable and would not be viable even if given a relief from payment.

Otherwise, the arbitrator may award a full or partial write off of the protected rent debt, deferral of the protected rent debt for a period up to 24 months, or no payment relief.

Can the period to apply for arbitration be extended?

Yes, the Act enables the Secretary of State to extend the initial 6 month period to apply for arbitration.

Will the Act result in large volumes of arbitration applications?

Many commentators doubt this.  There are questions over the complexity of the process and the issues to be considered by arbitrators as well as cost and privacy issues, which some believe will hold back applications.

How can we help?

TLT’s real estate lawyers are experienced in a full range of contentious and non-contentious real estate matters.  If you would like to discuss your requirements, please get in touch.  

Contributor: Florien Stone

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.