On 25 March 2022, the general moratorium on forfeiture of commercial premises due to non-payment of rent came to an end, just over two years since it was implemented at the start of the Covid-19 pandemic. The day before, on 24 March 2022, the Commercial Rent (Coronavirus) Act 2022 (2022 Act) received Royal Assent, ushering in a new statutory scheme of arbitration for England and Wales, to be used where commercial landlords and tenants have been unable to reach an agreement on rent arrears accrued in periods of mandated business closures.
Moratorium
The general moratorium, effective by way of section 82 of the Coronavirus Act 2020, prevented commercial landlords from forfeiting or effecting any right of re-entry for non-payment of rent. It was implemented hurriedly on 23 March 2020 and formed part of several measures curtailing landlords' rights of enforcement (see our earlier post here) to see off a likely wave of tenant insolvencies as rent fell due for periods where tenant businesses were unable to trade due to COVID-19 restrictions. Initially only slated to last until June 2020, the moratorium has been extended four times, with the most recent extension ending on 25 March 2022. The Government considers that the moratorium provided firms with "breathing space" to negotiate, but that now it is time to "draw a line under the uncertainty caused by the pandemic" and encourage the market to return to normal.
Commercial Rent (Coronavirus) Act 2022
With the general moratorium having come to an end, the Government has passed the primary legislation it announced in June 2021, which ring-fences rent arrears accrued by businesses forced to close by Covid-19 restrictions during periods of closure and introduces a binding arbitration process to resolve outstanding disputes relating to these arrears. Businesses such as pubs, gyms and restaurants which were forced to close their doors can invoke the 2022 Act for arrears between March 2020 and the date restrictions ended for their sector (Protected Arrears).
The Code of Practice
The introduction of a binding arbitration process builds on the Government's Code of practice for commercial property relationships following the COVID-19 pandemic (Code of Practice), published in November 2021, which provides non-binding guidance on how landlords and tenants should negotiate arrears (and which is not limited to Protected Arrears). The Code of Practice suggests that tenants that can pay their rent debts in full should do so and that, where they are unable to do so, they should negotiate with their landlord "in the expectation that the landlord will share the burden" where possible. The Government continues to encourage commercial parties to negotiate their own agreement using the Code of Practice, but sees the new arbitration scheme as a "backstop" should negotiations fail.
The arbitration scheme
Under the scheme, parties have six months from the date the legislation came into force (ie until 24 September 2022) to apply for arbitration, and the 2022 Act imposes a new form of moratorium which prevents landlords from exercising their usual remedies in respect of Protected Arrears while this application period is open or while an arbitration is in progress.
Either tenant or landlord can apply unilaterally for arbitration, and commence a process where arbitrators will look at the parties' businesses and attempt to strike a balance between preserving the viability of the tenant's business and preserving the landlord's solvency. Questions remain over how complex it may be for arbitrators to perform this assessment. Arbitral awards may include a full or partial write off, deferral of the debt on terms of up to 24 months or no concession.
The arbitration scheme is designed in part to pressure landlords and tenants who have thus far been reluctant to strike a deal to engage in meaningful negotiations, as parties that refuse to negotiate risk having an unfavourable award imposed upon them. Further, aspects of the scheme may discourage its use (and thus encourage private negotiations). Awards, by default, must be published (less commercial information that would significantly harm business interests) and arbitrators must dismiss any case where the tenant's business does not appear viable, leaving them open to landlord enforcement or insolvency processes. Therefore, the bigger impact of the 2022 Act and the arbitration scheme may be in its non-use.
Nevertheless, the Government's impact assessment estimates that around 7,500 cases will go to arbitration and that around 1,200 arbitrators will be required to facilitate this. Arbitration bodies have to be approved before administering the scheme, and BEIS has indicated that it will publish a list of approved bodies "in due course". Where a dispute is eligible, landlords or tenants will be able to apply directly to any of the approved bodies, which will then appoint an arbitrator.
For specific questions on eligibility for the 2022 Act arbitration scheme and its procedural steps, please get in touch with one of the team.
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The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.