Get Ready for Binding Arbitration

Commercial Property Rent Arrears

Much to the relief of defaulting commercial property tenants, the availability of commercial debt recovery procedures and Commercial Rent Arrears Recovery (CRAR) is likely to be curtailed under new proposed measures.

The new draft legislation published by the government termed as the Commercial Rent (Coronavirus) Bill (the Bill) provides for a new binding arbitration scheme.

Landlords may have to wait until 25 March 2022 to commence arbitration unless agreement can be reached with tenants.

Our initial view is that landlords are likely to make greater effort to agree payment plans or suitable lease variations with tenants following the potential restrictions to their normal enforcement rights and the prospect of a new and untested arbitration process.

What are rent arrears under the Bill?

The Bill is drafted to take into account rent, service charge, insurance rent, VAT and interest which may be due during tenant’s illness affected by coronavirus and termed as "Protected Rent Debt".

How is it decided whether a tenant was adversely affected by coronavirus?

A tenant can fulfil this condition only if it has a business tenancy and was required to close down its business premises or terminate trading in whole or in part under the COVID-19 pandemic guidelines, during the "relevant period".

The relevant period as per COVID 19 pandemic guidelines is between 21 March 2020 to 18 July 2021 (or 7 August 2021 in Wales).  This may differ by sector.  By way of example, hospitality and nightclubs in England are designated to be within this class from 21 March 2020 to 18 July 2021, whereas non-essential retail in England are put within this scope from 21 March 2020 to 12 April 2021.

When will arbitration be available?

The Bill proposes that the arbitration scheme can be ratified and enforced by 25 March 2022.

What about rent deposits?

The Bill allows arbitrator to consider withdrawals from rent deposits by landlords as Protected Rent Debts. This may be a concerning factor for landlords who have drawn down on rent deposits without an express agreement with tenants.

What about commercial rent claims brought by landlords at Court?

From the date the Bill is passed as an Act, no new claims can be brought by landlords against tenant.

Live proceedings can be stayed on application by either party on debts claims made between 10 November 2021 and the date of Bill is passed as an Act.

Landlords are also barred from applying for a winding-up or bankruptcy petition in respect of Prohibited Rent Debt until the conclusion of arbitration or expiry of the time limit within which it can be invoked.  

What must an arbitrator consider?

An arbitrator will need to take into consideration the viability of the business tenant and scope for relief from Prohibited Rent Debt.

The arbitrator can make appropriate award but any payments including instalments should be made by the tenants no later than 2 years from the date of the award.

What is the arbitration process?

As per proposed draft Bill, Arbitration must be initiated made within 6 months from the date when the Bill is passed as an Act.

A written notification with supporting evidence has to be made by either party within 6 months from the date when the Bill is passed as an Act. The other party has 14 days to respond with a counter-proposal.

The applicant has 14 days to consider the counter-proposal. After those 14 days (or 28 days if no response is received), either party can apply for arbitration.

An arbitrator can make an award on the on the available evidence or upon hearing from both parties.

Is there a new code?

A revised Code of Practice relating to relating applicable arbitration scheme has also been issued.  It sets out information relating to requirements and an outline of the arbitration process.

For further information regarding Residential or Commercial Property and Landlord and Tenant Law, please do not hesitate to contact Bill Dhariwal, Director and Solicitor on DDI: 01489 864 117 or Email: bill.dhariwal@lawcomm.co.uk