The Forfeiture Moratorium has been extended – But what about the arrears?

On 16 June 2021 the Government announced that it is drafting legislation to ringfence outstanding unpaid rent that has accrued during the pandemic in order to protect jobs and give businesses breathing space to recover.

Specific reference was made to nightclubs and hospitality which have been particularly badly hit but this could also extend to other sectors such as retail. The Government stated that it expects landlords to make allowances for the rent arrears relating to these periods of closure and to share the financial impact with their tenants.

The Government stated landlords and tenants will be encouraged to reach a mutually beneficial agreement concerning arrears relating to the relevant period.  Specifically it suggested such agreements could involve waiver of some of the arrears or agreed payment plans.

Where landlords and tenants cannot agree there will be a binding arbitration process delivered by private arbitrators in accordance with guidelines to be set out in the legislation. Arbitrators will need to undergo an approval process to prove their impartiality.

This latest Government initiative follows evidence gathering from a broad range of stakeholders concerned with commercial tenancies.  The Government response to the call for evidence will be published later this year.

The Proposed Arbitration

No details have yet been provided about:-

1. the proposed arbitration process;
2. the training and guidance to be given to the arbitrators;
3. the precise remedies or powers arbitrators will be given. 

However the Government will be keen to avoid Court proceedings challenging arbitrators' decisions so parties can expect the arbitrator's decision to be final in most cases.

This makes it very difficult for landlords, tenants and their professional advisers, to know the full extent to which the coming legislation is likely to impact upon them.

Whilst legislation to date has suspended various landlord remedies, including forfeiture, the coming legislation is expected to go further with arbitrators having the power to  vary  the lease obligations between landlords and tenants . Potentially this could be very useful for tenants struggling with intractable landlords and opens up the possibility of a real sharing of the burden of the consequences of the pandemic for the first time.

However there are many practical details that will need to be resolved. The length and cost of any arbitration will impact on its effectiveness. Neither a tenant struggling financially nor a landlord who has arrears of rent to manage are likely to welcome incurring additional costs. There may also be issues with finding enough arbitrators to deal with the demand. The Government has stated that arbitrators will need to be accredited and show they are unbiased but how they will do this is unclear. 

There is concern in some quarters about how an arbitration might be ham-strung by arrangements with third parties, such as a mortgagee or a superior landlord.  For example, would a landlord be able to avoid an arbitration if there are covenants in its own lease or loan documents preventing it from agreeing concessions with its tenants?  In addition, there are likely to be many cases where there are arrears relating to both the period covered by the jurisdiction of an arbitrator and arrears relating to a period outside of the arbitrator's jurisdiction.  In such circumstances it is likely to make much more commercial sense for parties to agree a settlement in the round rather than entering into separate court and arbitration proceedings.

With all of the above issues in mind landlords and tenants will be keeping a close eye on developments in the drafting of the legislation.