The Commercial Rent (Coronavirus) Act has been passed. It deals with rent arrears which accrued during the pandemic by business tenants.
The new legislation covering Rent Arrears
The Commercial Rent (Coronavirus) Act 2022 (“the Act”) was enacted on 24th March 2022.
The Act addresses rent arrears accrued by businesses that have been adversely affected by the coronavirus pandemic. The legislation puts the arbitration process on a legal footing and provides an arbitration process which is available to both tenants and landlords if they have not been able to resolve their differences by agreement. The arbitration process is to take effect from 25th March 2022.
The Act applies to all business tenants under a business tenancy (defined by Part II of the Landlord and Tenant Act 1954) who were forced to close their premises or businesses wholly or in part under Government regulations during the pandemic. Therefore, the Act’s focus is rent debt accrued during the pandemic by businesses operating in the retail, leisure and hospitality sectors.
Time Limit for Applications
Landlords and tenants who have been unable to agree on how to deal with rent arrears accumulated during the pandemic will have the right to unilaterally apply for arbitration during the six months following the date on which the Act is passed, i.e. 24th September 2022. However, it is quite possible that this deadline may be extended.
Arbitration Process for Commercial Rent Arrears
The statutory dispute resolution process will be administered by private arbitrators who will be approved by the Government.
The applicant may be either the landlord or the tenant and must notify the other party of their intention to refer the matter to an approved arbitration body (“Initial Notice”). The other party then has 14 days in which t respond. A reference to arbitration can be made at the end of the period of 14 days following receipt of the response. If no response is received, a reference to arbitration can be mad at the end of 28 days following service of the initial notice.
The reference to arbitration must include a formal proposal for resolving the matter, and must be accompanied by supporting evidence. Following submission of the initial proposal, the other party will have 14 days in which to file a formal proposal in response. The parties can submit revised proposals within 28 days of submitting their formal proposals.
The parties will also have the opportunity to make final proposals.
As a general rule, the parties will each be responsible for their own costs. The Arbitrator’s fee is set by the arbitrator and will be payable equally by the parties.
What is included in the Rent Arrears?
For the purposes of arbitration, rent arrears will include not only the principal rent but any amount payable by the tenant to its landlord or managing agent for the possession and use of the premises including VAT, service charge, insurance premiums and interest.
What is Protected Rent?
The arbitration process will not apply to debt that has accrued before the pandemic and will only apply to rent arrears accrued during such time period as the tenant’s business was “adversely affected by coronavirus”.
This is called the “protected period” and the rent arrears which accrued during this period are “ringfenced”. Normal periods of operation will not be within the scope of the arbitration process.
The arbitration process will not be available where the protected rent debt is subject to a CVA (Company Voluntary Arrangement), an IVA (Individual Voluntary Arrangement) or a compromise/arrangement sanctioned under the Companies Act 2006.
It will also be open to the arbitrator to dismiss a reference to arbitration if:
- The parties have already reached an agreement;
- The tenancy is not a business tenancy or there is no protected rent debt;
- The arbitrator assesses the tenant’s business and determines that it is not viable and would not be viable even if relief from payment was awarded.
An insolvency arrangement that has been proposed, is pending, or has been approved will therefore have priority over the arbitration process.
Reliefs from payment
The following “reliefs from payment” can be applied by the arbitrator in relation to the “ringfenced” arrears:
- Writing off the debt in whole or in part;
- Allowing additional time for payment of the debt, including provision for payment in instalments; and
- Reducing any interest on the debt in part or in its entirety.
Temporary Moratorium on Enforcement
Where a reference to arbitration under the Act is instigated the “moratorium period” starts on the day the Act is passed and finishes on the date that the arbitration concludes.
The Landlord may not use any enforcement procedures during this period so the Act overrides the enforcement provisions in the Lease or tenancy agreement.
Making the Arbitrator’s Award
It is within the arbitrator’s power to make an award that the tenant is to be given no relief from payment of the debt. The award will be legally binding on both landlord and tenant and there will be a maximum repayment period of 24 months.
In arriving at his or her decision, the arbitrator will try to balance preserving or restoring the viability of the tenant’s business insofar as that is consistent with preserving the landlord’s solvency and ensuring that the tenant is required to meet its obligations regarding payment of the protected rent in full and without delay.
The landlord’s solvency will be assessed by considering the landlord’s assets and liabilities and the landlord’s general financial position.
The tenant’s viability and solvency will be assessed with regard to previous rental payments made, the tenant’s assets and liabilities, the final position of the tenant and the impact of coronavirus on the tenant’s business.
How Cunningtons can help
Cunningtons’ Litigation department are expert at dealing with all aspects of property law.
If you would like further advice and assistance please contact Mark, Stella or Jon on 01376 326868, or by completing our contact form.