Please note that all references to Bill should now be read as Act following the Commercial Rent (Coronavirus) Bill having received Royal Assent on 24 March 2022.
Draft guidance for arbitrators (the Guidance) has now been produced on the process to be adopted in cases referred to the binding arbitration scheme due to become available to affected commercial landlords and tenants pursuant to the Commercial Rent (Coronavirus) Bill on 25 March 2022.
Although aimed at arbitrators, the Guidance crucially sheds light on the concept of “tenant viability” which, to date, has been much maligned by commentators as being a wholly uncertain concept. The Guidance will therefore be of some interest to both commercial landlords and tenants as they attempt to navigate the proposed “ring-fencing” of commercial rent arrears which arose during the coronavirus pandemic – together with the new arbitration scheme for disputes about the payment of such sums – and how this will work in practice when it comes into force.
As a preliminary point, the Guidance outlines that the new arbitration scheme can be viewed as a three-stage process as follows:
Stage two of the process involves an assessment by the arbitrator of a number of key concepts in the Bill as follows:
In the remainder of this note, we further examine these key concepts, as currently understood from both the draft Bill and Guidance. It is important to note, however, that both documents remain in draft and are, therefore, subject to change.
As the Bill is currently drafted, only those tenancies which fall within Part II of the Landlord and Tenant Act 1954 (the 1954 Act) will be eligible for the scheme. This will include tenancies which have been contracted out of the so-called ‘security of tenure’ provisions contained in ss.24-28 of the 1954 Act.
Based upon the current drafting of the Bill, it appears that the number of tenancies eligible for arbitration will be more limited than those currently protected from enforcement action under s.82 of the Coronavirus Act 2020. For example, head tenants not in occupation of premises (for example, if they have sub-let their premises) would not be eligible for an assessment under the scheme, although their sub-tenants may be. If enacted as currently drafted, therefore, this may mean that head-tenants are left liable to make up the shortfall in any recovery they make from their sub-tenants to their own landlords to avoid the risk of forfeiture etc in respect of such sums.
A ‘protected rent debt’ is rent that is unpaid and attributable to a period of occupation of the premises during the protected period where the business tenancy in question was adversely affected by coronavirus.
There are three concepts in this definition which require further examination:
“Rent” here will include the amount payable by the tenant for possession and use of the premises in question, service charge, VAT, interest and insurance charges.
The key defining feature of this concept is whether the business or premises in question was subject to a ‘closure requirement’, imposed by coronavirus regulations. It is irrelevant for the purposes of the Bill if only limited activities were permissible for the business and from the premises during the protected period, such as delivery or click and collect services.
The code of practice for commercial property relationships following the COVID-19 pandemic (the Code) gives further guidance as to closure requirements for some sectors and will need to be considered alongside the Bill/Guidance here.
The protected period runs from 21 March 2020 to the earlier of the last day the business or premises were required to close or were subject to regulation as to how the business was run, or the way the premises were used in England to 18 July 2021.
It is notable that the current drafting does not allow for more than one ‘protected period’. It appears that tenants who were subject to closure requirements at some stage during the protected period, then allowed to reopen (for example, during the summer of 2020) but subsequently subject to further restrictions, will be eligible for relief for the whole of the ‘protected period’. This interpretation is also in line with the Code.
If the parties have already reached an agreement as to the treatment of the debt which would otherwise constitute a ‘protected rent debt, then the arbitrator must make an award dismissing the reference to arbitration.
One of the major criticisms levied at the Bill to date has been its lack of guidance on the meaning of the ‘viability’ of the tenant’s business.
Viability will be considered by the arbitrator at both the second and third stages of the arbitration process. The arbitrator will be required to make an award dismissing the reference at stage two in the event it determines: “at the time of assessment [that] the tenant’s business is not viable and also would not be viable even if the tenant were given relief from payment, of any kind”.
Section 6 of the Guidance details the factors to be considered by the arbitrator at stage two of the process. These factors supplement the provisions of s.16(1) of the Bill which details those matters to which the arbitrator must have regard when making an assessment of viability including: the assets and liabilities of the tenant - including any other tenancies to which the tenant is a party - and the impact of coronavirus on the business of the tenant.
The Guidance contains a non-exhaustive list of evidence to which the arbitrator may wish to refer or request from the tenant if it has not already been provided by the tenant as part of the initial reference.
This evidence includes bank account information that covers savings, current and loan accounts for financial years postdating March 2019; financial accounts for each financial year postdating March 2019; details of dividends paid to shareholders for each financial year postdating March 2019, and evidence of financial grants (eg under the Government’s furlough scheme) and/or loans obtained for each financial year postdating March 2019.
The Guidance suggests that bank account information, gross profit margin and/or net profit margin, ordinarily found in financial or management accounts, may be the most useful indicators as to whether the tenant’s business is viable - and that consideration of the profit margins both pre and post the protected period is likely to provide the most helpful picture to determine viability.
However, the Guidance is also quick to state that: “viability is deliberately not specifically defined, in order to take into account the vast array of different business models both within and between sectors” and that “viable business models will differ from party to party across sectors”.
This sentiment is acknowledged further by the fact that the arbitrator is to have discretion and flexibility in determining what additional evidence and information they require from the tenant when making their assessment – recognising that different businesses will have different information available, depending on their nature and size.
The Guidance is also clear that it will be for tenants to demonstrate the viability of their business. Therefore, tenants considering the referral of a dispute to the scheme would be wise to consider collating their evidence now to ensure they are ready to provide it when required.
We will shortly be providing further commentary on both the additional restrictions expected to be brought in by the Bill in respect of qualifying rent debts and the relief that might be awarded by an arbitrator in the event that relief is considered appropriate in any given case.
However, here are three key points that all commercial landlords and tenants should now consider.
Document any agreements reached
We expect there may be many arguments between parties as to whether an agreement has been reached in relation to what would otherwise be a protected rent debt. Ensuring that any compromise made between the landlord and the tenant is clearly documented will be key to avoiding disputes here.
Review whether any rents remain unpaid for periods falling due outside the “protected period”
The usual landlord’s remedies, including forfeiture, will once again become available to landlords for any such rent arrears for periods outside the protected period regardless of whether there are also protected rent debts.
Similarly, those tenants with unpaid rents ineligible for the new arbitration scheme should be mindful that all of the usual remedies will once again be back on the table for landlords for any unpaid rents, regardless of when they fell due, from 25 March 2022 for forfeiture and the exercise of Commercial Rent Arrears Recovery, and 31 March 2022 for insolvency-related methods.
For further information, please contact Kerra Jelbert.
The information in this note is correct as at 8 March 2022.
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