New Code of Practice on Covid Arrears as the Arbitration Scheme comes into force

1.  The Context

To understand where the 2022 Act and the latest Code of Practice fits in, it is helpful to recap the journey so far on pandemic-linked commercial rent debts:

•  The Covid pandemic resulted in unprecedented challenges for both landlords and tenants and in the commercial property sector was most acutely felt in retail and hospitality who endured several rounds of government imposed closures from March 2020.
•  To try to protect businesses from insolvency during this period, the government introduced a series of measures that restricted landlords’ usual options for enforcing payment of rents and breaches of covenant (in addition to support schemes for tenant businesses including business grants, furlough payments and rates relief).
•  Landlords and tenants were consistently encouraged by Government to try and find a consensual way through the crisis and to consider rent concessions and repayment plans: recognising that landlords should work with tenants who genuinely needed support; while tenants who could afford to pay should still do so.
•  During the pandemic tenants who sought to take advantage by using Covid restrictions as an excuse to withhold payment of their rents, while failing to engage on repayment discussions, were given short shrift by the Courts. The first High Court judgments on Covid arrears were made in April 2021 and were found in favour of landlords impacted by non-paying tenants (see our article on the first judgment – which DACB obtained in favour of the successful landlord here.
•  Again in April 2021 the government launched its Call for Evidence to better understand how businesses were responding to the rising mountain of rent arrears that had accrued during the pandemic.
•  The government then announced it would be launching a mandatory arbitration scheme  for unresolved protected rent debts accrued over the Covid lockdown periods. Alongside this a revised Code of Practice was published to include guidance on what was expected of both landlords and tenants in terms of pre-arbitration discussions, linked with viability and affordability.
•  The Commercial Rents (Coronavirus) Act 2022 came into force on 24 March 2022. This brought the mandatory arbitration scheme for protected rent debts into effect, as well as formalising the moratorium on enforcement of these debts.
•  The moratoriums on enforcement options for non-protected rent debts were also lifted with effect from 25 March 2022, restoring traditional enforcement remedies.

2.   The Scheme

The latest revised edition of the Code of Practice focuses on the final resolution of protected rent debts via the arbitration scheme. The key aims continue to be to help preserve viable tenant businesses who need support, while recognising that any relief should be no greater than necessary and tenants who can afford to do so should meet their lease obligations in full.

Details of the arbitration scheme itself are set out in the 2022 Act, however this is complemented by the Code of Practice which breaks the scheme down into three main stages:

a)  Stage 1: The Pre-Arbitration Process

Both parties are encouraged to reach agreement first without the need for intervention.

As part of this, there is a statutory 28 day pre-arbitration process that must be followed before an application can be made. This involves a letter of notification being issued, a 14 day response period and a further 14 days to respond with any counter proposals supported by relevant evidence (examples of which are found in Annex B (https://www.gov.uk/government/publications/commercial-rent-code-of-practice/commercial- rent-code-of-practice-following-the-covid-19-pandemic#annex-b-evidence-to-consider-when-  negotiating)).

If a resolution still hasn’t been reached, either party can then make an application for referral to arbitration, accompanied by their formal proposal for resolving the debt.

b)   Stage 2: Eligibility Criteria

In order for an arbitration referral to proceed, the arbitrator must be satisfied of the following:

1. That the reference meets the minimum criteria for referral, e:

 The debt has accrued under a business tenancy, i.e. Part II of the Landlord and Tenant Act 1954 applies to it.

 The debt is a “protected rent debt”. This is sector specific and details can be found in Annex A (https://www.gov.uk/government/publications/commercial-rent-code-of- practice/commercial-rent-code-of-practice-following-the-covid-19-pandemic#annex-a-  timelines). For the most part it covers all rent, service charge and insurance debts under leases for the periods from 21 March 2020 to 12 April 2021 (non-essential retail) or from 21 March 2020 to 18 July 2021 (hospitality, leisure and personal care).

 The debt is unresolved, i.e. the landlord and tenant haven’t been able to reach agreement on repayment.

 The tenant isn’t subject to any insolvency process including CVAs, IVAs, compromises or arrangements.

ii.  That the tenant is still considered to be viable.

What counts as viable is deliberately not defined to account for different business models in different sectors. Parameters for arbitrators to consider are set out in Annex E (https://www.gov.uk/government/publications/commercial-rent-code-of-practice/commercial- rent-code-of-practice-following-the-covid-19-pandemic#annex-e-indicators-and-evidence-for-  assessing-the-viability-of-the-tenants-business) to the Code of Practice, which follows the more detailed working draft guidance

(https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file  statutory-guidance-to-arbitrators-commercial-rent-coronavirus-act.pdf) the government separately published last month.

The Code of Practice also affirms two important points:

•  It is primarily for the tenant to demonstrate and evidence the viability of their business.
•  Examples of relevant evidence can be found in Annex B (https://www.gov.uk/government/publications/commercial-rent-code-of- practice/commercial-rent-code-of-practice-following-the-covid-19-pandemic#annex-b-  evidence-to-consider-when-negotiating), but at the very minimum the tenant should provide at least the previous year’s full bank account information, including savings accounts, current accounts and loan accounts.

c)   Stage 3: The Arbitration Procedure

Provided the arbitrator is satisfied the arbitration can proceed, the respondent will have 14 days to submit a formal proposal in response to the application. Both parties can then submit further proposals or seek an extension. The arbitrator may also request further evidence.

If a hearing is not requested, the arbitrator must issue an award asap after the latest proposal is received (assuming no extension is granted). Or if no counter-proposals are submitted, the award must be issued asap following the 28th day after the application is made.

If a hearing is requested, it must be held within 14 days of receipt of a request and an award must then be issued within 14 days of the hearing (assuming no extension is granted).

The arbitrator’s award is final and binding and will either:

1.  State that the tenant shall be given no relief from payment of the ring fenced debt (i.e. payment requires to be made in full); or
2. Grant relief from payment by one or more of the following ways:

•  Writing off the whole or part of the debt;
•  Giving additional time to pay the debt or allowing the debt to be paid in instalments (payment must be within 24 months); and/or
•  Reducing or cancelling the interest owed in relation to the debt.

3.  Other Useful Guidance

The following points from the revised Code of Practice are also worth noting:

•  The arbitration process will not override existing agreements - the focus remains to try and reach agreement without the need for judicial intervention.
•  The parameters of the enforcement moratoriums that remain in place are also clarified, and the circumstances in which landlords can and cannot currently take steps to enforce payment of both protected rent debts and post-pandemic lease arrears, are set out.
•  The Code of Practice also recognises that there are many businesses in the sector not subject to the 2022 Act that were still indirectly impacted, including supply chain businesses and others who found it uneconomical to open. Whilst the scheme does not apply to these businesses, the government is strongly encouraging such parties to use the same principles of the Code of Practice to reach an agreement.