On 24 March 2022, the Commercial Rent (Coronavirus) Act 2022 (“the Act”) came into law with the ultimate aim to help resolve disputes between commercial landlords and tenants relating to the payment of Covid-19 rent arrear payments through an arbitration process. You can read more about the scheme via our previous blog.
Below, we have provided an overview of the new arbitration scheme and how it will operate.
What time period of rent arrears does the arbitration scheme apply to?
As noted previously, the rent arbitration scheme came into force on 24 March 2022. A landlord or tenant may only refer arrears that relate to a “protected period” and this must be done within six months of the Act coming into force. Therefore, if a referral is not made by 23 September 2022, the parties will lose the right to arbitrate (although, as with other Government Covid schemes, this period may be extended).
The Act only applies to businesses and tenancies under part 2 of the Landlord and Tenant Act 1954. Arbitrators are expected to follow similar principles to those sent out in the Code of Practice for commercial property relationships following the pandemic.
What payments does the scheme apply to?
A landlord or tenant can make a referral in relation to any of the following unpaid sums:
- Annual rent
- Service charge
- Interest on an unpaid amount
- VAT
- Insurance rent
These sums will be protected from Court proceedings/enforcements by the landlord provided that the following apply:
- The sums fell due between 21st March 2020 and 18th July 2021 (in England) or 21st March 2020 and 07th August 2021 (in Wales)
- The tenant operates the property for business purposes only
- The tenant was required to shut all or parts of the business due to Covid-19 restrictions
- The tenant is not subject to a Company Voluntary Arrangements (CVA)
- The referral is made within six months of the Act coming into force
The arbitration process
Pre-action
Before the process can begin, a party must notify the other party that it intends to make a referral. This then gives the other party an opportunity to submit a response within 14 days of receiving the notification.
Next, if an agreement cannot be reached in the pre-action stages, a referral can then be made.
Making a referral to arbitration
A referral to arbitration must include:
- A formal proposal for resolving the matter – i.e. a repayment proposal
- Supporting evidence
Once a party has made a referral, the other side has 14 days to submit a response along with any supporting evidence. In the majority of cases, it will be the tenant providing most of the supporting evidence in order to show why a concession or payment plan is required.
Once both parties have submitted a formal proposal, they are then given a further 28 days to submit a final proposal, which will then be considered by the arbitrator.
It is possible for either or both parties to request an oral hearing, but this is not compulsory. An arbitrator can reach a decision based on the written proposals and evidence provided by the parties.
What must the arbitrator consider when making an award?
- Assets and liabilities of the tenant
- Rent payments previously made by the tenant, for example, look at whether the tenant made payments on time before the pandemic, is the pandemic the reason payments haven’t been met?
- The financial position of the tenant
- Impact of the pandemic on the tenant’s business
This is why it is imperative for the tenants to provide such evidence and supporting documents, in order to prove the reason they are behind on the payments is due to the pandemic.
When the arbitrator makes the award, it will either be:
- Grant relief to the tenant, for example, a repayment arrangement, provided the amount is paid within two years or;
- Require the tenant to pay all the outstanding amount with no relief.
What should parties consider before making a referral to arbitration?
As with any dispute resolution process, there are advantages and disadvantages. In our view, the following considerations are likely to be relevant:
- Speed: The process is likely to be significantly faster than issuing Court proceedings to recover arrears
- Simplicity: Unlike with civil proceedings, the process will not require extensive case management (by way of directions, etc)
- Certainty: The decision will be “final and binding” and appeals will only be available on certain, limited grounds
- Costs: Each party will be expected to bear their own legal and arbitration costs and so a cost/benefit analysis should be carried out before embarking on the process
- Choice: The parties will have the ability to select an arbitrator to act for them
Comment
Wherever possible, landlords and tenants should try to negotiate and reach agreements about any unpaid arrears accumulated during the pandemic. However, if agreements cannot be reached then the arbitration scheme will be something for either party to consider in helping them either:
- Pay the landlord over a period of time; or
- For the landlord to receive money from the other party.
How can we help?
Oliver Maxwell is a Senior Associate in our Dispute Resolution team, specialising in property disputes.
For more information concerning the subjects discussed in this article, please call Oliver or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or contact us via our online form.
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