Covid rent arrears: get negotiating and don't leave arbitration too late
It is "crucial" that retail tenants with outstanding Covid-19-related arrears, negotiate with landlords as soon as possible and apply for binding arbitration by 23 September 2022 if needed to resolve the dispute.
New Law and Code of Practice
Many retailers, hospitality providers and other consumer-facing businesses have struggled through the Covid-19 pandemic with store closures and broader customer reticence about high street shopping and dining. Except for the lucky few who achieved some form of rental concession from their landlord, tenants have been expected to pay their rent in full throughout. Government measures, such as the restriction on a landlord's ability to forfeit a lease for non-payment of rent to curtail the ability of creditors – particularly landlords – to recover debts, have now largely fallen away although some protections remain in relation to the recovery of arrears relating to a period when a business was mandated to close.
On 7 April 2022, the government published a revised code of practice for commercial property relationships between landlords and tenants following the Covid-19 pandemic. The code of practice sets out the behaviours that the government expects landlords and tenants to follow when seeking to deal with covid related debt (including service charges and insurance rent).
This code of practice aligns with the Commercial Rent (Coronavirus) Act 2022, which came into force on 24 March 2022 in England and Wales (noting that Scotland has adopted an alternative approach). The Act covers business tenants (including shops, pubs, gyms and restaurants) in England and Wales where closure of their business premises was mandated (in full or in part) by the government. For "non-essential" retailers in England, the relevant period runs from 21 March 2020 to 12 April 2021.
Business Minister, Paul Scully, has said that "this new law will give commercial tenants and landlords the ability to draw a line under the uncertainty caused by the pandemic so they can plan ahead and return to normality".
Cooperation and Negotiation
The government has made clear that it encourages commercial landlords and tenants to negotiate between themselves in order to reach agreement where possible. The arbitration procedure (outlined further below), should only be used by parties as a last resort. The code of practice states that tenants who can repay their rent debts in full, should do so, and when they cannot, parties should seek to negotiate, with the expectation that landlords should try to share the burden where they can. Further, any waiver of (part or all) rent arrears or permitting additional time to pay, should only be granted by a landlord where necessary.
Last Resort Arbitration
The new binding arbitration scheme is now effective, having been introduced by the department for business, energy and industrial strategy (BEIS). Although the general suspension on commercial evictions and restrictions on Commercial Rent Arrears Recovery in England and Wales ended on 24 March 2022, eligible firms can apply for binding arbitration for the following 6 months – i.e. until 23 September 2022. Any commercial evictions will therefore continue to be suspended until the later of 23 September 2022 or the conclusion of any arbitration.
The code of practice outlines how the arbitration process provided for in the Act, will work. Either party can make a reference to an arbitrator by contacting an approved arbitration body, so long as the parties have failed to reach an agreement through negotiation. The reference can be made unilaterally. The arbitrator can waive all or part of the rent or make provision for payment in instalments over a maximum period of 24 months.However, they cannot include any other relief as part of their award. Parties should also be aware that they are free to continue to negotiate outside of the legal arbitration process and the code of practice outlines some other forms of alternative dispute resolution if parties wish to pursue them.
Viability and Affordability
The statutory guidance for arbitrators published on 8 April 2022 makes it clear that arbitrators must assess the viability of a tenant's business and its ability to afford the rent. Whilst there is no clarification of what constitutes "affordability" or "viability", the arbitrator cannot take into account the possibility of borrowing additional funds or restructuring. Financial information from both sides can be considered. However, the landlord's financial information is only likely to be relevant where there is a question over the landlord's solvency.
The arbitrator must also disregard anything that either of the parties has done to manipulate their financial position in order to improve their position regarding an award for relief from payment of protected rent. Tenants will therefore need to be aware that landlords will be forensically analysing the information submitted with any proposals.
What to do next?
To the extent that retailers, consumer brands and hospitality providers have not already done so, it is crucial that where they are tenants with outstanding Covid-related arrears, that they put a plan in place for how they are going to deal with those arrears as soon as possible. It is sensible to engage with landlords early to avoid incurring further costs through dealing with the new and potentially uncertain arbitration process.
Before reaching the negotiating table, retailers should give significant thought to the government's intention that "if you can pay, you'll have to pay" and should therefore make a clear plan as to the levels of any rent arrears which they may be willing and able to afford. Although potentially costly to retailers, this may help avoid an arbitration process where the parties have less control over the (binding) outcome and may ultimately benefit the retailer in presenting itself as proactive and realistic to landlords. In any event, tenants should ensure that discussions commence imminently and that if arbitration is likely to be required, the 23 September 2022 deadline is earmarked.