The new Arbitration Scheme – what awards can be made?

Posted: 25/03/2022

If you have read our previous article discussing eligibility under the proposed new arbitration scheme set out in The Commercial Rent (Coronavirus) Act (the Bill having now received royal assent on 24 March 2022), you may be wondering whether to trigger the arbitration process by serving a letter of notification of intention to apply for arbitration under the Act.

A key aspect of this decision will relate to what can be achieved through the arbitration process and what relief the arbitrator can award.

Section 15 of the Act sets out the fundamental principles to which the arbitrator must have regard in making any award. The arbitrator must also consider the proposals made by the parties pursuant to s.11 of the Act for settlement of the debt.

S11 Proposals

A s.11 Proposal is a proposal for resolving the matter of relief from payment. A proposal must accompany an application for request for arbitration and the responding party has 14 days from receipt of the proposal to respond with their own proposal. Parties will have a further opportunity to exchange final proposals after the initial proposals have been sent and received.

There is no prescribed form for a s.11 Proposal but it must be accompanied by supporting evidence and verified by a statement of truth. While the proposal might include witness evidence, the financial evidence of the impact of the arrears, or non-payment of them in the case of the landlord’s submission, will be key.

S15 Principles

The underlying principle of the Act is to preserve a tenant’s viability, as long as this does not come at the cost of the landlord’s solvency. A full overview of how an arbitrator should assess a tenant’s viability is found in draft guidance (the Guidance) which was published last month.

The orders the arbitrator may make are set out below.

Dismissal

The arbitrator can dismiss the reference to arbitration if:

• the Protected Rent Debt has already been paid or an agreement regarding the repayment of the Protected Rent Debt has been reached
• the tenant is not occupying the premises under a business tenancy
• the debt is not a Protected Rent Debt or
• the tenant’s business is not viable and would not be viable even if an award was made in their favour.

Awards

Where a reference to arbitration is not dismissed, there is still no guarantee that the arbitrator will grant the tenant partial or complete relief from payment of the Protected Rent Debt. The arbitrator has the power to write off the whole or part of the debt or to allow time to pay the whole or part of the debt, subject to the time limits set out below. The arbitrator can also reduce to zero any interest payable by the tenant under the terms of the lease in relation to the whole or part of the debt.

However, the arbitrator only has limited discretion when making an award and the extent of this discretion will depend on which of the following four scenarios exist:

1. Where both parties have submitted s.11 Proposals, both of which are consistent with the S15 Principles, the arbitrator must make an award based on the Proposal which is most consistent with the s15 Principles.
2. Where both parties have submitted s11 Proposals, but only one is consistent with the s15 Principles, the arbitrator must make the award based on the proposal that is consistent with the S15 Principles.
3. If only the party who made the reference to arbitration serves a s11 Proposal, as far as that proposal is in line with the S15 Principles, the award must be made to reflect that proposal.
4. In all other cases, such as where no party submits a s11 Proposal that meets the s15 Principles, the arbitrator has full discretion to make the award they believe is fit having considered the S15 Principles.

Where relief is granted, it has the effect of changing the terms of the lease to reflect the relief given. Guarantors or former tenants also cannot be chased for any shortfall.

If partial relief is given and the tenant is still required to make a payment in one lump sum or in instalments, the last date for the awarded sum to be paid back in full can be no later than two years from the date of the award.

Timing of the award

The award will be made within 14 days from the date of an in-person hearing (unless the arbitrator considers it reasonable to extend this deadline) or as soon as reasonably practicable if the decision is being made on the papers alone. It must also be published.

No confidential information will be disclosed in the award without the consent of the party to whom it relates. This will include:

• commercial information relating to a party or to any other person where the disclosure of the information would or might significantly harm the legitimate business interests of the person to which it relates or
• information relating to the private affairs of an individual where the disclosure of the information would or might significantly harm that individual’s interests.

Costs

Arbitration costs

Another vital part of the decision whether to use the new arbitration scheme will be the question of who pays for it.

Where the arbitrator makes an award either dismissing the reference or stating the tenant is or is not entitled to relief, the arbitrator must also make an award requiring the responding party to reimburse the applicant for half of the arbitration fees (including any oral hearing fees where only one party requested the same) paid in advance.

However, the arbitrator does have some discretion here if they believe it to be more appropriate to award a different proportion – that can be as low as zero - leaving the applicant out of pocket for the arbitration fee.

According to the recent draft guidance, an example of where the arbitrator may wish to deviate from the standard position of each party having equal responsibility for arbitration costs is where a party has been obstructive. Although there is no further guidance on this, we should expect the rules of costs in general litigation to have a bearing and parties should behave accordingly.

Whether a party has complied with the Code of Practice for commercial property relationships following the Covid-19 pandemic may also have a bearing on costs.

Legal fees

A party cannot recover their legal fees associated with the arbitration process from the opposing party and no costs incurred can be passed through the service charges of the lease or recovered in any other way through the lease concerned.

If you wish to start the arbitration process, it is important that this is done correctly and we would suggest that advice is sought at the outset. There are strict time limits involved in the process so, if you receive a letter of notification of an intention to apply for arbitration, you should seek immediate legal advice. As there are no provisions in the Act which define when a letter under the Act has been received, it may be that the time starts running from the date of the letter rather than the date of receipt.

A full breakdown of the arbitration process can be found at Annex C of the Government’s latest Code of Practice for Commercial Property Relationships following the Covid-19 Pandemic.

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