Arbitration for Commercial Rent Arrears Claim resolution mandated

In the UK government’s policy paper which was released on 4^th August 2021, it was confirmed that legislation mandating arbitration for the resolution of disputes around COVID-19 rent arrears should be in place this session i.e prior to the end of March 2022. 

This is the date when the full forfeiture moratorium measures put in place by the Coronavirus Act 2020 and restrictions on the Commercial Rent Arrears Recovery procedure are expected to end.

(https://www.gov.uk/government/publications/resolving-commercial-rent-arrears-accumulated-due-to-covid-19)

Code of Practice (“the Code”)

There is currently a Code of Practice for commercial property relationships during the COVID-19 pandemic between landlords and tenants.  This was put in place in June 2020, last updated in April 2021. The general principle of the Code is that the parties are expected to communicate and landlords should negotiate supportive measures for tenants.  Potentially these measures may include moratoria and rent-free periods, ie landlords are expected to share the financial impact of rent arrears with their tenants.   This is being pushed by the Government, but is not binding on either party.

(https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector/code-of-practice-for-commercial-property-relationships-during-the-covid-19-pandemic)

Recent cases

In good news for landlords, the most recently decided cases of (1) Commerz Real Investmentgesellschaft mbh v TFS Stores Limited [2021] EWHC 863 (Ch), (2) Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021] EWHC 1013 (QB) and (3) London Trocadero (2015) LLP v Picturehouse Cinemas Limited [2021] EWHC 2591 (Ch) underline that whilst the Code is indeed important, it is not law and is only voluntary guidance in nature.  The landlords had in any case sought to comply with the Code.  These recent cases confirmed that the Courts do not accept that standard wording, never intended to cover a Covid-like situation, could be stretched, reinterpreted or have terms implied to give tenants defences or remedies against their landlords claims for rent arrears. 

Landlords are therefore in most instances advised to pursue a court claim for the arrears and not delay to in enforcement.  It is expected that an updated Code will be released in early November and further developments are awaited.

Future legislation

The three key aspects of the approach are: 1) ringfencing of arrears, 2) encouragement of negotiated settlement and 3) mandatory arbitration as the last resort.

Ringfencing arrears:

As soon as legislation is passed, the protective measures in place for commercial tenants are expected to only apply to ringfenced arrears, being those accrued since March 2020 during period of closures caused by the pandemic.

Ringfencing will apply until restrictions are eased for the tenant’s sector. This means that the ringfenced period will be different depending on the sector the tenant is operating within. On the face of it, the approach is intended to benefit those sectors which, generally speaking, were hardest hit.

Negotiated agreement and/or settlement:

Disputes should, where possible, be resolved through negotiations with both landlord and tenant acting in good faith.

A non-exhaustive list of options for new arrangements that could be agreed were given in the Code and included full or partial waiver or deferral of all or part of the rent or lease payments.

Arbitration scheme:

The mandatory and binding arbitration scheme, a so called “last resort”, aims to provide an impartial and manageable process where a negotiated settlement cannot be achieved.

The expectation is that both landlord and tenant will contribute to the cost of the arbitration but where a party is found not to have negotiated in good faith in the "spirit of the legislative principles" the arbitrators may be empowered to grant the costs of the arbitration as part of their decision.

Indications are that the burden of proof will be on the tenant to demonstrate why they are seeking a rent concession with the presumption that, where they can afford to, they should pay in full. 

However until the draft legislation and updated Code are produced there is still uncertainty and it is likely that it will be some time before landlords faced with persistent debt will be able to take advantage of any meaningful remedy to recover COVID-19 arrears.

For commercial property advice, please get in touch with our Commercial Property team on 01689 887894 or email a member of the team.