In early 2020, the COVID-19 pandemic was in its early stages but was starting to adversely affect businesses. The government introduced measures to protect businesses that were unable to pay their rent from enforcement action. One such measure introduced provisions to restrict a landlord’s ability to forfeit a lease for non-payment of rent and use commercial rent arrears recovery. These restrictions on landlords’ enforcement options ended on 25 March 2022.
Despite these restrictions ending, the government recognises that businesses are still affected by the pandemic and therefore
it aims to preserve viable businesses and the jobs they support. As such, the government has introduced the Commercial Rent (Coronavirus) Act 2022 (CRCA 2022) which provides an arbitration process to resolve claims for rent arrears that accrued during periods of enforced closure, if the parties have not already reached an agreement. The CRCA 2022 prevents landlords from exercising their usual remedies while the application period for arbitration is open or while arbitration is in progress, but only in respect of protected rent debt. Landlords will be able to exercise their usual remedies in respect of unprotected rent.
A dispute over rent arrears is eligible for arbitration where the tenant and landlord are parties to a business tenancy and are not in agreement as to relief from payment of a protected rent debt.
1. Am I Party to a “Business Tenancy”?
A business tenancy is a tenancy of property which is occupied by the tenant for business purposes. A tenancy that has been contracted out of the Landlord and Tenancy Act 1954 is still a business tenancy for these purposes.
2. What is “Protected Rent Debt”?
- the amount payable for possession and use of the premises;
- service charge;
- interest due on any unpaid amount of either or both of the above;
- VAT chargeable on any of the amounts above.
To be a “protected rent debt”, the business tenancy must have been adversely affected by coronavirus. This means if any part of the business carried on by the tenant at the premises was legally required to close for a period of time between 21 March 2020 and 18 July 2021 for premises in England, or 7 August 2021 for premises in Wales.
Finally, the rent must be attributable to occupation during a “protected period”. The “protected period” began on 21 March 2020 and ends with the last day on which the business or the premises were legally required to close.
Only the rent which can be attributed to a protected period will be protected rent for the purposes of the CRCA 2020. For example, if a full quarter’s rent is outstanding but only part of the quarter is within the protected period, only the proportion of unpaid rent which is reasonably attributable to the protected period will be protected rent.
3. Is there a Dispute as to Relief from Payment of a Protected Rent Debt?
There must be a dispute between the landlord and tenant where they cannot agree on whether the tenant should get relief from payment for a protected rent debt. Relief from payment can be any of:
- writing off the debt (in whole or in part);
- giving the tenant time to pay the debt (in whole or in part), including by way of instalments; and/or
- reducing or writing off any interest payable by the tenant under the terms of the tenancy in relation to all or part of the debt.
Where the landlord and tenant have already reached an agreement on the matter of relief from payment, there is not a dispute and the matter cannot be referred to arbitration.
If the dispute is eligible, either the landlord or the tenant can refer it to arbitration. The deadline to do so is 23 September 2022. Before doing so, the parties must carry out the pre-arbitration steps. This involves the party intending to make the reference notifying the other party of its intention to do so. The respondent does not have to respond to the applicant’s notification, but if it wishes to do so, it has 14 days to submit its response. If the respondent submits a response, the reference to arbitration can be made 14 days after the response was received by the applicant. If the respondent does not submit a response, the reference can be made 28 days after the applicant serves its notification.
Once the dispute reaches arbitration, the arbitrator will assess the viability of the tenant’s business. The arbitrator is required to dismiss the reference if they determine that the tenant’s business is not viable and would not be viable even if the tenant was given relief from payment.
Following this, the arbitration will progress to the next stage, which determines the relief the tenant should be given from payment of the protected rent debt, if any. The parties will put forward proposals to suggest what relief, if any, the tenant should get from payment of the protected rent debt accompanied by supporting evidence. The arbitrator will assess the proposals and will use them to form the basis of the arbitrator’s award. In doing so, the arbitrator will apply the principles of preserving the viability of the tenant’s business and requiring the tenant to pay the protected rent in full and without delay.
Arbitration is intended to be a last resort and the parties are expected to come to an agreement where possible. For more information on the CRCA 2022 or the arbitration process it provides, please see the Commercial Rent Code of Practice on the following link: Commercial rent code of practice following the COVID-19 pandemic – GOV.UK (www.gov.uk)
If you have any queries concerning the CRCA 2022 or rent arrears accrued during the pandemic in general, please contact our Property Dispute Resolution Dept – Simon Pressdee at Simon.Pressdee@daviesandpartners.com or Tracey Ashford at Tracey.Ashford@daviesandpartners.com.