On 25 March 2022 there is due to come into force the new Commercial Rent (Coronavirus) Act 2022 (“the Act”). The Act will replace the existing restrictions on landlords taking enforcement action against tenants for rent arrears accrued during the pandemic and replace them with new, more limited restrictions, and a new compulsory and binding arbitration process. This Article provides a brief overview of the new laws as they are currently drafted. We have also produced a more in-depth guide to the Act, which can be found here: A Guide to the Commercial Rent (Coronavirus) Act 2022
Scope of the Commercial Rent (Coronavirus) Act 2022
Protected Rent Debt
The concept of a ‘protected rent debt’ is the foundation of the Act. The new restrictions on enforcement of rent debts and the requirement for compulsory arbitration only apply to ‘protected rent debts’.
A rent debt is ‘protected’ if:
- It falls due under a ‘business tenancy’ i.e. a tenancy comprising property occupied by the tenant for business purposes;
- It relates to rent and/or service charge and/or insurance rent and/or VAT and/or interest on the sums;
- It relates to a tenancy that was “adversely affected by coronavirus”; and
- The debt is attributable to a “protected period”.
Adversely Affected by Coronavirus
A business tenancy is automatically deemed to have been adversely affected by coronavirus if it was obliged to close its business (or part thereof) or its premises (or part thereof) as a consequence of the restrictions. It is irrelevant if specific limited activities were allowed to carry on despite the obligation to close.
Attributable to a “Protected Period”
The protected period starts on 21 March 2020 and ends on the earlier of:
- 18 July 2021 (being the date in England that all restrictions on businesses eased); or
- The last day on which the tenant’s business was subject to a closure requirement or a specific coronavirus restriction.
A specific coronavirus restriction is one that regulated the way a business was carried on or a premises was used, but does not include general requirements. For example it will include a period in which a restaurant could open but was subject to restrictions such as limits on group numbers, but will not include requirements to display information relating to Coronavirus or to wear masks.
A rent debt is only protected to the extent it is attributable to a period of occupation within the protected period. If part of the rent debt is attributable to a period outside of the protected period it is not protected. E.g. if the protected period for a particular tenancy ended on 18 July 2021, then the rent attributable to the period from and including the June quarter day (24 June 2021) up to and including 18 July 2021 will be protected, but the rent attributable to the rest of the quarter i.e. 19 July 2021 to 28 September 2021 will not be a protected rent.
Rent Deposits
If a landlord has drawn down from a tenancy deposit to pay a protected rent debt, that sum will be treated as unpaid rent due from the tenant to the landlord (unless the tenant has topped up the rent deposit) and can therefore be referred to arbitration.
Compulsory Arbitration Process
The Act introduces a new binding arbitration process for protected rent debts. In other words, for any disputes that arise in relation to a protected rent debt within the next six months, it compels the parties to refer that dispute to arbitration. This goes hand in hand with the new restrictions on landlords taking other enforcement action against tenants in respect of protected rent debts, which are discussed below.
The arbitrator’s remit is to decide whether there is a protected rent debt and, if there is, whether the tenant should be given relief from payment of that debt and, if so, what relief.
Relief from Payment
The Act empowers the arbitrator to make an award that provides for one or more of the following:
- Write off the whole or part of the protected rent debt;
- Allow the tenant time to pay the protected rent debt in instalments (as long as they are paid within 24 months of the award); and/or
- Reduce or write off any interest payable by the tenant on the protected rent debt.
Existing Agreements
The parties cannot refer a protected rent debt to arbitration if they have already reached an agreement as to some form of relief from payment of that debt. It is not the purpose of this new compulsory arbitration process to ‘undo’ agreements already struck between landlords and tenants during the pandemic.
The Arbitrator
The arbitrator will be an individual or a panel appointed by an “approved arbitration body”. It is anticipated that the parties will have some involvement in selecting the arbitrator, although the Act does not expressly provide for this. The arbitrator must have the necessary qualifications required to oversee the arbitration and make an award and must be independent of the parties. Only the approved arbitration body can remove the arbitrator.
Timeline for Referring a Dispute
Either party may refer a dispute about a protected rent debt to arbitration within 6 months of 25 March 2022 (although there is the power for the Secretary of State to extend this deadline). The referring party is required to give the other side notice of their intention to refer the dispute to arbitration so in practice they must make the decision to refer to arbitration at least 28 days in advance of the deadline.
Should a landlord make a reference to arbitration?
Although the process is ‘compulsory’ in that a landlord cannot bring any other form of action in relation to a protected rent debt in the next 6 months, it is not compelled to make the reference to an arbitrator (although a tenant may do so). Since the arbitrator has the power to ‘compromise’ the debt, landlords may be better off waiting this period out and not making a reference to arbitration. Once the moratorium on enforcing protected rent debts expires (see below), it will then be able to pursue the tenant for the rent debt through the courts and, since the court has no jurisdiction to compromise a rent debt, the landlord should receive judgment for the full sum owed plus costs. In deciding whether or not to wait the period out or refer to the arbitration process, a landlord should take into account that a money judgment is only any good if the tenant can pay it. If the tenant has a viable business but simply cannot afford to pay the debt, then a compromise may be in the landlord’s commercial interests.
The Process
The Act sets out a detailed process for making a reference to arbitration. As noted above, the applicant must first give the respondent notice of its intention to make the reference. When the applicant makes the reference it must include a formal proposal for resolving the matter of relief from payment of the protected rent debt accompanied by supporting evidence. The respondent has the option to respond within 14 days with its own proposal accompanied by supporting evidence.
There is the opportunity for both parties to revise their formal proposals and it is recommended that both landlords and tenants give very careful thought to doing so and to making sure their proposals comply with the arbitrator’s principles set out in section 15 of the Act, which guide the arbitrator on the award they may make.
What Award can the arbitrator make?
The arbitrator can:
- Provide the tenant with some form of relief in relation to the protected rent debt (by reducing the sums owed and/or allowing payment in instalments/over time and/or reducing interest);
- Require the tenant to pay the whole protected rent debt immediately; or
- Dismiss the reference.
The reference must be dismissed if:
- The parties have already reached an agreement in relation to the protected rent debt;
- The tenancy is not a business tenancy and/or there is no protected rent debt; or
- Having assessed the viability of the tenant’s business, the arbitrator determines that the business is not viable and would not become viable even if it were awarded some relief from payment of the protected rent debt.
What relief should the arbitrator grant?
If the arbitrator does not dismiss the reference for one of the above reasons they must determine the relief, if any, to be granted to the tenant. The Act strictly controls the award that can be made by the arbitrator by reference to any final proposal that the parties have put forward during the process:
- If only the applicant has put forward a formal proposal (either its original proposal when it made the reference or a revised version), then the arbitrator must make an award in the terms of the proposal, provided it is consistent with the principles in section 15.
- If both parties have put forward formal proposals (original or revised versions) and both are consistent with the principles in section 15, the arbitrator must make an award in the terms of the proposal that is most consistent. If only one proposal is consistent, then they must make an award in the terms of that proposal.
- If neither party has made a proposal that is consistent with the provisions in section 15 of the Act then the arbitrator must make an award in terms consistent with those principles.
It is therefore very important that parties ensure their proposals are consistent with the principles in section 15, to ensure their proposal is taken into account by the arbitrator and that they are not placed at a disadvantage. If an original proposal is not consistent, the party should consider revising it.
Effect of the award
The award has the effect of varying the lease in relation to the payment of the protected rent debt. This means the tenant is not in breach of the lease by reason of not paying a sum the arbitrator has written off and/or not making a payment before it falls due under the award. Similarly guarantors (and former tenants under Authorised Guarantee Agreements) cannot be pursued for sums written off by the award or for sums before they fall due under the award.
The Arbitrator’s Principles – Section 15
Reference is made above to the arbitrator’s principles in section 15 of the Act. These provide that:
- Any award should preserve, or restore and preserve, the viability of the tenant, so far as that is consistent with preserving the landlord’s solvency.
- The tenant should, in so far as it is consistent with the above principle, be required to meet its obligations as regards the payment of protected rent in full and without delay.
- In considering the viability of the tenant’s business and the solvency of the landlord, the arbitrator must disregard anything done by either party to manipulate their financial affairs so as to improve their position in relation to an award.
Viability vs Solvency
The arbitrator’s focus is on preserving the viability of the tenant’s business so long as that is not at the cost of the landlord’s solvency.
“Viability” is deliberately not defined by the Act; it is designed to be a flexible concept that can be adapted to take account of the particular tenant’s business. It is not, however, the same as solvency or profitability. Plenty of businesses that might be regarded as insolvent or profitable may otherwise be viable.
In assessing the “viability” of the tenant’s business the Act provides that the arbitrator must have regard to:
- The assets and liabilities of the tenant, including any other tenancies to which the tenant is party;
- The previous rental payments it has made under the tenancy to the landlord;
- The impact of coronavirus on the tenant’s business; and
- Any other information relating to the financial position of the tenant that the arbitrator considers appropriate.
The protected rent debt should be disregarded when considering the viability of the tenant’s business, as the whole purpose of the assessment is to determine whether the business is viable if relief is granted.
In assessing the “solvency” of the landlord, the arbitrator must have regard to:
- the assets and liabilities of the landlord; and
- any other information relating to the financial position of the landlord as the arbitrator considers appropriate.
The distinction between the two assessments the arbitrator has to carry out is stark. Most notably, there is no express obligation on the arbitrator to consider the impact of coronavirus on the viability of the landlord’s business. The arbitrator is essentially confined to determining whether it is solvent on a going concern basis i.e. can it pay debts as they fall due.
Their review of the tenant’s business, however, is required to be more holistic; they are not concerned with whether the tenant is solvent but whether its business is, or can with relief from the protected rent debt be, viable.
The saving grace for landlords is that, if the tenant’s business is “viable” without any relief in respect of the protected rent debt being granted, then the arbitrator should make an award that provides for the tenant to pay in full and without delay.
There are not, however, any options for the arbitrator to penalise a tenant whose business is, and has at all times been, viable, but who has failed to comply with its obligations in the lease to pay rent and other sums until such time as compelled by the arbitrator’s award to do so.
The Code of Practice for Commercial Property Relationships and the draft statutory guidance for arbitrators (due to be finalised and published when the Act is passed) both provide arbitrators, landlords and tenants with guidance as to assessing the viability of a tenant’s business and the solvency of the landlord. They also list examples of the ‘supporting information’ the parties should provide to the arbitrator to assist them with their assessment e.g. bank account details, management accounts, business performance details, details of government assistance provided during the pandemic, details of other debts, details of dividends and bonus payments paid out to directors and shareholders. The lists are not exhaustive nor is it necessary for the parties to provide everything on those lists.
Costs
The arbitrator’s costs are to be split equally between the parties (although the arbitrator does have the power to make an award requiring one party to contribute more if they think it appropriate in the circumstances).
Legal and other costs, however, are to be borne by the parties; there is no power for the arbitrator to award costs nor to penalise an unreasonable party through the making of a costs order. The landlord is prohibited from recovering its costs from the tenant even if the tenancy allows for this.
Arbitrator’s fees will be set by the approved arbitration bodies and published on their websites (the Secretary of State has powers to cap these fees if they wish to do so).
Restrictions on Remedies and Insolvency Arrangements
In order to support the arbitration process, the Act introduces a new moratorium that prevents a landlord who is owed a protected rent debt from using the following enforcement actions against a tenant in relation to that debt during the moratorium period:
- making a debt claim in civil proceedings;
- using CRAR in respect of the protected rent debt (i.e. seizing the tenant’s goods);
- enforcing a right of re-entry or forfeiting in respect of a protected rent debt; and
- making a withdrawal from a tenant’s deposit in respect of the protected rent debt.
The “moratorium period” commences on 25 March 2022 and ends on:
- (where the matter is referred to arbitration) the day on which the arbitration concludes; or
- (where the matter is not referred to arbitration within the 6 month deadline (or later if that deadline is extended by the Secretary of State)), the last day of that period.
Debt Claims Issued before the Act is Passed
Claims issued on or after 10 November 2022
If a landlord has issued a debt claim against a tenant that includes a claim for a protected rent debt on or after 10 November 2021, the court must stay the proceedings on the application of either party in order to enable the payment of the protected rent debt to be resolved (by arbitration or otherwise). If judgment has already been made on the claim and has not been paid then the tenant can refer the matter to arbitration to seek relief on the part of the judgment that relates to a protected rent debt.
Claims issued before 10 November 2022
However, the Court has an inherent power under the Civil Procedure Rules to stay any proceedings or judgment and, based on the drafting of the Act, there is an argument to be made that any judgment given after 10 November 2021 and before 25 March 2022 in favour of the landlord, may not be enforced insofar as it relates to a protected rent debt and that it may, instead, be referred to arbitration.
Unprotected Rent Debts
The new moratorium only relates to protected rent debts. After 25 March 2022 landlords will be able to forfeit or exercise CRAR in relation to a rent debt that does not relate to the protected period. Landlords will also continue to be permitted to issue debt claims against tenants and/or make withdrawals from rent deposits for unprotected rent debts. Tenants should therefore make sure they pay all unprotected rent debts to avoid enforcement action against them.
Landlord’s Right to Appropriate Rent
If a tenant pays rent due under a business tenancy during the moratorium period at a time when it owes the landlord both a protected rent debt and an unprotected rent debt, the landlord must use the payment to meet the unprotected rent debt before applying it to the protected rent debt.
Where a tenant owes both an unprotected rent debt and a protected rent debt and, between the last day of the protected period for the protected rent debt and 24 March 2022, the tenant has made a payment of rent, the landlord must use that payment to meet the unprotected rent debt before it is applied to the protected rent debt.
Using Tenant’s Deposit
During the moratorium period a landlord cannot draw down a protected rent debt from the tenancy deposit.
If the landlord has lawfully drawn down a protected rent debt from the tenancy deposit before the beginning of the moratorium period, the tenant is not required to top up the deposit before the end of the moratorium period.
Intermediate Tenants/Head Landlords
An intermediate tenant/head landlord who is not in occupation of a premises for business purposes does not have a “business tenancy” for the purposes of Part II of the Landlord and Tenant Act 1954 and therefore does not benefit from the protection provided by the Act.
If an intermediate tenant fails to pay a rent that would otherwise be considered a protected rent debt (including because its sub-tenant failed to pay rent they owe under their business tenancy), the superior landlord retains the right to take enforcement against the intermediate tenant. If that action involves forfeiting the superior lease then, as a matter of law, the sub-lease also falls away.
It is open to both the intermediate tenant and the sub-tenant to apply to court for relief from forfeiture. Relief from forfeiture is an equitable/discretionary remedy but the court will usually grant it if a tenant pays all of the arrears and the landlord’s costs. The Act provides that, if the sub-tenant makes the application, for the purpose of determining whether to grant relief, the court must disregard any failure to pay the protected rent debt. The intermediate tenant/head landlord would, however, need to pay the full arrears in order to obtain relief.
Restrictions on Insolvency
Company Tenants: Winding-up Petitions
From 1 April 2022, during the moratorium period the landlord is prohibited from presenting a petition for the winding-up of a tenant company or an LLP unless the landlord is owed a debt that is not a protected rent debt.
Individual Tenants: Bankruptcy Petitions
During the relevant period the landlord is prohibited from presenting a petition for a bankruptcy order against a tenant who is an individual where the underlying demand, judgment or order on which the landlord relies includes any protected rent debt and (in the case of a demand) was served or (in the case of a judgment or order) the claim was issued during the relevant period.
Note: the ‘relevant’ period for this purpose is not the moratorium period. It is the period beginning on 10 November 2021 and ending on the last day of the moratorium period (as defined above).
A bankruptcy order made on or after 10 November 2021 but before 25 March 2022 may be regarded as void, if it would not have been made at a time the Act was in force.
Guarantors
The restrictions on issuing winding up petitions/bankruptcy petitions against tenants apply equally to:
- any person who has guaranteed the obligations of the tenant under the business tenancy;
- any person/company who or is liable on an indemnity basis for the payment of rent under a business tenancy; and
- a former tenant wo is liable for the payment of rent under a business tenancy.
CONTACTS
If you require any further information or assistance in relation to the Commercial Rent (Coronavirus) Act 2022 or any other property dispute please contact one of our experts:
Caroline Howard – Partner/Head of Real Estate Disputes
T: 020 3696 5651
E: choward@brecher.co.uk
Emma Wells – Director, Real Estate Disputes
T: 020 3696 7583
E: ewells@brecher.co.uk
Wendy Shoniregun – Assistant Solicitor, Real Estate Disputes
T: 020 3848 4351
E: wshoniregun@brecher.co.uk
This article is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this article may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
